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The Cocoa Craving Comedown

May 18, 2020

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The steep decline in the price of cocoa coincides with the escalation in the spread of COVID-19. The cocoa market had been maintaining trade around the 2800-2900 region before seeing a steep slide that has since taken prices as low as 2200.

After making a bottom in mid-March around the 2200 level, the market has been trying to rebound, but a lack of overall demand may keep prices under pressure for the foreseeable future. Since mid-April, the market has made a series of higher lows, and recent price action saw the market breakout clearly above the 2400 level.

Declining demand due to the closure of retailers is likely the major catalyst for weaker cocoa prices. Grinding in Europe, for example, may see a 3% decline from the previous year. The North American region could see a drop of 5.3%, while Asian processing could fall by 9%.

The ongoing pandemic could fuel a further decline in consumer spending, and demand for chocolate is likely to fall further as prices rise and as the economic impact of the virus becomes clearer. The decline in disposable income for luxury goods may erode not only chocolate demand but also demand for similar products in the months and quarters ahead and could keep the cocoa market under some pressure.

If demand for cocoa-related products, such as chocolate, is under pressure, what might be fueling the recent rise in cocoa to a two-month high? The answer is supply and fear of a shrinkage in supply. Although the coronavirus pandemic has led to a decline in product demand, it is also making shipping and transportation far more challenging than normal. Ghana, for example, is the world’s second-largest cocoa producer. It is also, however, the African leader in cases of the virus.

In addition to the ongoing COVID-19 pandemic, the cocoa supply situation may also be considered bearish and could potentially put a cap on any rise in price. Inventories are reportedly at a 9.5-month high of nearly 4.5 million bags as of May 1st. That figure is quite a bit higher than last December’s multi-year low of almost 2.7 million bags.

The market will have its way, however, and recent price action has painted a more bullish picture compared to previous weeks. The bulls could potentially have enough in the tank to take price for a test of the 2600 region. Beyond that level, a run towards 2800 may become increasingly likely.

Unless a significant change is seen in the virus pandemic, however, any rallies in cocoa should be viewed with a degree of skepticism.

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