Cocoa is an important agricultural commodity found in abundance in Ghana and Ivory Coast. The commodity’s main physical market is in London while the futures market is usually in the United States and Europe. It is mostly used for the confectionary and beverage industries.
In the past, cocoa was mostly an important consumer goods ingredient for the US and European markets. Today, this has changed as tastes in the Asian market develop. Today, most confectionary companies are pivoting to the Asian market which has a big addressable market.
As the population and demand in Asia has grown, so has the supply of cocoa beans. The supply has been as a result of technology which has put more acreage of land into farming. It has also led to the development of chemicals that have killed more weed and made the farms more productive.
The supply has been unconstrained too. This is because unlike in the crude oil market, cocoa producers are not unified. Therefore, they tend to overproduce without considering the price. If they did, Ghanaian and Ivory Coast farmers could create an OPEC-like organization to limit production and boost prices. Since this has not happened, the price of cocoa has continued to fall as shown in the chart below.
Increased production has not been the only reason for the decline in cocoa prices. Brexit has contributed to this weakness because cocoa is primarily traded in the London Commodities Exchange. Another reason has been the weakness in the Chinese economy which is no longer seeing double-digit growth.
Cocoa has reached $2098 per tonne. This price is below the 100 and 50-day moving averages with the commodities channel index (CCI) at minus 29. The price is at the middle band of the Bollinger Bands. There is a likelihood that the price will remain at the depressed levels until when the outlook for Brexit will be clear.
