Folks around the world have come together since 2009 to celebrate World Chocolate Day on July 7, which reportedly celebrates the introduction of chocolate in Europe during the year 1550. Chocolate comes from seeds of the Theobroma cacao tree that has a long history in Central America, Mexico, and northern South America. The bitter raw seed is fermented to develop the flavor in milk or dark chocolates that you love.
Cacao vs Cocoa: What’s the Difference?… “If you buy chocolate, you have likely noticed that some packages say they contain cacao while others say cocoa… In some cases, there are important differences. At other times, the only difference may be the marketing lingo chosen by the manufacturers… The contents of the beans provide the basis for chocolate products. However, there’s not complete agreement on when to use the terms cacao and cocoa respectively. Some experts use ‘cacao’ for the pods, beans and ground-up contents of the beans, reserving ‘cocoa’ for the powder left after pressing the fat out of the ground beans (research source). Makers of raw (unroasted) or less processed cacao bean products often use the word cacao rather than cocoa… Bean-to-bar chocolatiers, who make chocolate from scratch starting with fermented, dried beans, only use the word cacao for the pod and beans before they’re fermented. After fermentation, they call them cocoa beans.” – Healthline
Chocolate’s retail pricing is certainly not celebrated this year after cocoa futures skyrocketed 56% since mid-summer 2022 and 100% overall since spring 2017, which has cocoa trading at highs from the last four decades. One popular type of non-premium chocolate is York Dark Chocolate Peppermint Patties. When comparing the price for an 84oz, 175-count box of peppermint patties at Costco, the price was $14.99 in Dec. 2019 and $19.99 in Jul. 2023. The recent spike in cocoa futures followed the August 2019 analysis in Part 1 (Twitter thread) when the price action was volatile and consolidating, and the increase in retail sweet chocolate pricing was assisted by a spike in sugar that was covered in “Trading Sugar and the Sugar High” published in Apr. 2023. Here’s an excerpt from Part 1:
“Fundamental issues surrounding cocoa and technical signals on the futures price chart may portend a rally… Cocoa has a wide variety of uses that are not limited to chocolate, cocoa butter, and coloring agents for food products. Despite being one of the world’s smallest soft commodity markets, there are global implications for importers and exporters, food and candy producers, and the retail industry… A niche developing in the chocolate market is a demand for cocoa nibs, which are chocolate in its purest form. Cocoa nibs are dried and fermented bits of cocoa beans that go through less processing without unhealthy additives and preserving naturally occurring nutrients in the bean. The nibs offer a concentrated source of antioxidants, fiber, iron, and magnesium, as cocoa provides a variety of potential health benefits, such as stabilizing blood sugar, reducing depression, and reducing the risk of cardiovascular disease and cancer. Cocoa and chocolate are attracting a larger consumer base around the world due to its reported nutrition and medicinal benefits.” – TraderStef
Today, 75% of the world’s cocoa production and distribution originates in West Africa, which is experiencing issues with crop growth, inflation dynamics related to energy that plagues the West due to the war in Ukraine and loose central bank monetary policy during the pandemic, and an ongoing increase in demand from the Far East that’s noted in Part 1.
Chocolate-making ingredient cocoa hits highest price in 46 years… “Prices are rising in reaction to a tight market for cocoa beans, which are mainly produced in Ivory Coast and Ghana. Arrivals of cocoa at Ivory Coast ports for export are down nearly 5% this season. The International Cocoa Organization (ICCO) widened this month its forecast for a global deficit on cocoa supply from 60,000 metric tons previously to 142,000 metric tons. ‘It is the second consecutive season with a supply deficit,’ said Leonardo Rosseti, cocoa analyst at broker StoneX. He said that the stocks-to-use ratio, an indicator of cocoa availability in the market, is expected to fall to 32.2%, the lowest since the 1984/85 season.” – Reuters, Jun. 28
Let’s break down what is behind the price spike in chocolate:
- Higher than average rain in Côte d’Ivoire has caused flooding in cocoa fields that caused a 5% decrease in exports. According to the ICCO, the reduction has created a deficit of approximately 142,000 metric tons of cocoa so far. Excessive rain and humidity have also created conditions for an outbreak of blackpod disease.
- Fears that the El Nino weather pattern that emerged in the Pacific this year is likely to cause drought-like conditions in West Africa, and that will impact the crop cycle going forward for an indefinite period of time.
- The war in Ukraine caused a price spike in oil, coal, and natural gas that are key ingredients in fertilizer production. Less fertilizer equates to lower crop yields. Cocoa farmers expect 80 cocoa beans for every 100 grams vs. a normal harvest that produces 120 beans.
- Due to inflation, companies and chocolatiers that produce chocolate products must pass on cost increases to consumers. Dark chocolate that is made from 50-90% of cocoa solids experienced the largest rise in price.
- A rally in the price of sugar since spring of 2020 and other raw materials multiplied costs for producing consumer chocolates.
If you are not a seasoned trader in the futures market where each contract of cocoa represents 10 metric tons, here is a revised list of stocks to consider that’s sorted by daily trading volume:
- $MDLZ – Mondelez International, Inc. (NASDAQ)
- $HSY – Hershey’s (NYSE)
- $NSRGY – Nestle (OTC)
ICE Cocoa Futures quarterly chart as of Jul. 6, 2023 close…
Excerpt from the May 28, 2019 weekly chart analysis:
“An Ascending Triangle drawn back from the summer of 2018 dominates the chart, along with a Cup ‘n Handle formed in 2019 with a break above its Neckline and the Ascending Triangle’s topside trendline last week. The breach is not decisive at this point, and there is resistance at the 50% Fibonacci level… A bullish 50/200 Simple Moving Average (SMA) Golden Cross occurred in early April… The chart is bullish but requires decisive buying above the Triangle and Neckline to solidify the move.”
I am referencing the quarterly chart above to provide a big-picture view of how it’s been since 1980. The Ascending Triangle morphed into a tight Symmetrical Triangle in mid-2020 as the price action consistently printed higher lows and lower highs that remained below the 50% Fibonacci level. The 50 Exponential Moving Average (EMA) has trended flat since 2018 but initiated an upturn in 2023 so far. The 3Q23 price action in July has hit a brick wall at lateral resistance drawn back to 1980. Despite numerous attempts since 3Q09, the price has not closed above that lateral on a quarterly basis. The rally since mid-2022 decisively breached all topside trendlines on large buy volume.
The DMI-ADX is in an extended power trend since mid-2020 and shows no sign of breaking down in the near term, StochRSI is in overbought territory and could remain there for a while, and buy volume has been strong in a rising trend since mid-2020, especially since 3Q22. The chart is bullish and needs a breather. The price action might consolidate and then eventually break out and challenge the 1Q11 all-time-high since there is no substantial resistance that would hold it back.
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Headline Collage Art by TraderStef