Cocoa futures turn bitter as prices drop 30% from record highs

By Myra P. Saefong

Analyst says a 'longer-term top' for prices may likely be in place

Cocoa futures on Friday marked a drop of 30% from their all-time highs, as a buying frenzy that lifted prices to a record just two weeks ago gave way to expectations for better crop conditions and worries about a drop in demand.

"Something material has changed in the longer-term outlook for prices," John Caruso, senior market strategist at RJO Futures, told MarketWatch. There has been some improvements in West African crops from damper weather that also may improve the outlook for next year's main crop, he said.

The outlook right now is that the crop for the 2024-2025 marketing season "can only improve and demand destruction may take hold," said Caruso.

On Friday, July cocoa (CC00) (CCN24) marked a steep decline of 30.5% from an all-time intraday high of $11,722 per metric ton on April 19, based on the most active contract.

Prices ended 23.1% lower for the week, which was the worst weekly performance on record based on data going back to July 1959, a Dow Jones Market Data analysis of FactSet data shows.

Read: Cocoa price plunges by nearly 30% in just two days as speculators bail out

Year to date, however, cocoa prices are still trading 94.1% higher. Extreme weather, including "Harmattan" conditions - a season in West Africa marked by dry winds that form over the Sahara - led to expectations that production in West Africa could be reduced this year, said Jack Scoville, vice president of the Price Futures Group, in Friday commentary.

The availability of cocoa from West Africa "remains very restricted, and projections for another production deficit against demand for the coming year are increasing," he said. Still, "ideas of tight supplies remain, based on more reports of reduced arrivals in Ivory Coast and Ghana."

Read archived story on cocoa's rally: Could a looming chocolate crisis shake Easter after cocoa prices doubled?

Mid-crop harvest is now underway, Scoville noted, and there are "hopes for additional supplies for the market from the second harvest."

Boost from Hershey's results

Cocoa prices ended Friday's session sharply higher - with the most active, July cocoa contract up $582, or 7.7%, to settle at $8,145 per metric ton on the ICE Futures U.S. exchange.

That was the largest daily percentage increase since April 18.

Prices on Friday got a boost from stronger reported earnings from Hershey Co. (HSY), pulling prices well off the morning lows, said Caruso. Cocoa had touched a session low of $6,990.

Hershey on Friday reported first-quarter adjusted earnings, which exclude nonrecurring items, of $3.07 a share, topping the FactSet consensus of $2.76. Sales grew 8.9% to a higher-than-expected $3.25 billion.

Price peak?

Overall for the week, however, the market has "come under pressure from traders getting out of their long futures positions, as is usually the case when a market goes straight up," said Darin Newsom, senior market analyst at Barchart.

The Commodity Futures Trading Commission's Commitments of Traders (COT) report last week showed the noncommercial net-long futures position for cocoa had been decreased to 29,584 contracts - the smallest net-long position since the week of February 14, 2023, which ironically enough was Valentine's Day, Newsom told MarketWatch. The latest COT report was set for release Friday afternoon.

Last week's report also showed the long futures position in cocoa had been cut to 51,685 contracts, down from the late January 2024 high of 133,9861 contracts - the smallest that the long futures position had been since the week of November 17, 2020, he noted.

"The bottom line is funds did not want to be long the market anymore," said Newsom. "This goes back to Newton's first law of motion applied to market analysis: A trending market will stay in that trend until acted upon by an outside force, with that outside force usually investment activity."

So, does this pullback in prices present a good time to buy? Newsom said his "market rule no. 1" is "don't get crossways with the trend," again citing Sir Isaac Newton's principle of inertia.

'Cocoa could be a buy again at some point, but I wouldn't want to be the first to jump back in on the long side.'Darin Newsom, Barchart

"Cocoa could be a buy again at some point, but I wouldn't want to be the first to jump back in on the long side," Newsom added.

RJO Futures' Caruso also said cocoa may still see some gains, but a "longer-term top" for prices is likely now in place, given expectations that next year's crop will improve and the market may see demand for cocoa fall.

On the charts, prices look to have topped, said Caruso - adding that they would have to see a 34% drop from their peak for RJO Futures to define the decline as a "crash."

-Myra P. Saefong

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05-03-24 1409ET

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