Is cocoa a good bet this month?

Cocoa futures have made some impressive gains over the last few weeks, with May ICE London cocoa rising to a six-year high and ICE NY cocoa hitting the highest level in two years. Funds are currently long of cocoa and cocoa is looking promising.

But the window for a buy opportunity could end up being fairly short because of fundamentally weak demand in Europe. Also, changed weather conditions in the two main African growing regions mean that the expected crop tightness could end up less than initial forecasts.

Dry weather in Ivory Coast, the largest global supplier of the cocoa bean, has been boosting prices since the start of this year and the latest rally in cocoa futures followed comments from Ivory Coast’s Agricultural Minister who said that the country’s mid-crop is expected to be 25% lower than last year. The mid-crop is the smaller of Ivory Coast’s two annual harvests and began at the start of April.

Funds piled into NY cocoa futures, increasing their net-long positions of NY cocoa futures by 365 in the week ending 4 April to a three-year high of 51,490 long positions.

But current rains in the Ivory Coast and Ghana will prop up the crop and make sure that the shortfall compared with last year is far less than 25%. According to the International Cocoa Organisation (ICCO), a growers’ association, “the main cocoa producing zones in the two top producing countries, Côte d’Ivoire and Ghana are witnessing beneficial rains that are envisaged to support production and assuage fears of supply tightness.”

ICCO added that while the cumulative arrivals of cocoa beans at Ivorian ports are lower year-on-year, in Ghana volumes of purchases of graded and sealed cocoa beans are on the increase – moving in the same direction as the anticipated trend for the current season.

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Where to from here for cocoa futures?

While this latest rally is looking good, there is a fundamental underlying weakness in the cocoa market that will not allow for current prices to hold. ICCO noted last month global sales of chocolate are expected to grow by a very modest 1% this year.

Overall global GDP is expected to rise by 2.2% this year which means that, while consumers have more spending power in general, the underlying demand for chocolate products is actually sliding. The two lead regions in terms of demand are North America and Asia while demand in Europe and Latin America is almost no longer growing.

That’s why any bit of positive news about European consumption has the capacity to temporarily lift the market and why this Thursday when the European Cocoa Association reported that Europe’s cocoa grindings rose by 0.5% year on year, the highest rise in the first quarter of a year since 1999, May ICE NY cocoa futures reacted with a 1.62% rally while May ICE London cocoa #7 rose +1.25%.

While this created a brief window for a buy opportunity, in the mid to longer term this will not be enough for a buy and hold.

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