Cocoa futures trade to 12 year highs, pushed by El Niño weather

Cocoa futures prices have been roaring higher and have hit a 12-month peak on the ICE this week. Some of the price action was caused by shortfalls in some of the main growing regions combined with surprisingly strong demand. However, some of the price move was fuelled by expectations of further weather issues later in the season.

After three years of the La Niña weather pattern, which has just come to an end, we are in the calm before the storm. The El Niño is back and is expected to wreak havoc on the weather across the globe later this year.

Unlike La Niña, which follows the cooling of the Pacific Ocean waters, El Niño forms in response to the heating of the ocean. It tends to occur every two to seven years and to last between nine and twelve months. It is still in the process of formation and is expected to reach full swing during the second half of 2023.

“El Niño can cause dry conditions in some areas and heavy rainfall in others, disrupting agricultural production. It is likely to affect prices of commodities like cocoa, soybean oil, sugar and grains. This has helped sustain cocoa futures prices in an otherwise challenging month for commodities,” said a report by WisdomTree, referring to trading in August.

• Beginners Guide to Commodities
• Armchair Academy: Introduction to Futures
• How the construction of data centers is changing the gas market
• Can gold break above that key $3000 level in March?
• New European defence ETFs launched as budgets increase

Cocoa production issues

Even before the El Niño, wet weather and plant disease in the Ivory Coast and economic turmoil in Ghana have contributed to the cocoa market being in deficit, for a third year in a row. The two countries between them account for over 60% of the global cocoa crop. The International Cocoa Organization more than doubled its forecast for a supply shortfall this year to 142,000 tonnes.

The effects of El Niño are also expected to hit crops in Indonesia and Ecuador, which are particularly exposed to weather-related disruption.

Since the start of the year cocoa futures have rallied 58% and are now the best performing commodity after orange juice, which gained 70% after freezing weather disrupted the crop. Cocoa is now trading at 15.3% above its 200-day moving average.

Looking at speculative positions in the US futures market, a further rally seems likely as speculators have positioned themselves mostly on the long side of the trade.

Cocoa grinding and chocolate production

While the latest demand data showed a surprising decline in grinding in North America, a closer look at trade data indicates that instead of grinding at home, the US is now importing more ground cocoa.

Ivory Coast, the world largest cocoa grower, has increased its grinding by 15%, and since opening a new processing facility is grinding 30% of its harvest. This increase would also explain the slight decline in the amount of cocoa that has been ground in Europe and Asia in the second quarter, following on from a record high level earlier in the year. Chinese demand for chocolate remains high despite the slowdown in the country’s economic growth.

In all, global demand for cocoa remains strong, indicating that all of this season’s output will be easily absorbed. This combined with expected weather issues could account for some volatility over the coming weeks and months.

Related WisdomTree ETFs