The price of cocoa remains above the critical support level of $7,000 per ton. However, since the peak at $11,500, the correction has exceeded 30%, theoretically placing the market in a bear market. On the other hand, examining the trends from this year and the main wave that started in 2022, it is clear that the $7,000 level is crucial to maintain. A drop to the $5,800-6,000 range per ton might not necessarily indicate an imminent return to levels around $2,000-3,000. It is noteworthy that market volatility has significantly decreased. The question remains whether there has been a change in the fundamentals.
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The current price drop from historical peaks is one of the largest in history but follows the largest increase, considering significant historical highs. In the 1970s, similar volatility occurred when supply was also heavily restricted. It appears that the current declines may be excessive compared to past observations. If price changes were to revert to the "mean," it would imply a return to around $8,700-9,000 per ton.
Source: Bloomberg Finance LP, XTB
In the last 30 years, the largest declines have typically occurred in May and October, closely linked to the cocoa harvest cycle. Often, strong declines have been followed by rebounds in subsequent months. Interestingly, the largest drop in the past 30 years was in May 2003, at 28%. This was followed by a strong rebound the next month, and 2003 was generally very volatile. Last year also saw a significant price drop, followed by a three-month recovery. The question is whether history will repeat itself now.
Source: Bloomberg Finance LP
Recent price declines are partly due to uncertainty about supply capabilities and a disconnect between market realities and futures markets. However, slight improvements are visible in New York's listings. After several months of declines, there is an uptick in speculative long positions, which could be a signal.
Source: Bloomberg Finance LP, XTB
The futures curve has flattened slightly, but the outlook for March/May next year remains similar. There are doubts about whether the situation will improve enough for prices to drop to around $5,000-5,500 per ton. Recent rains in West Africa do not alter the issues with tree diseases, and many trees will need to be replaced. The outlook for West African harvests over the next 1-3 years is not promising, suggesting prices should remain higher than $5,000-5,500 per ton. Additionally, supply is not the only factor; demand also plays a role. Chocolate manufacturers continue to use up reserves, which are dwindling. Once reserves are nearly exhausted, manufacturers will need to pass on some costs to consumers, potentially leading to demand destruction. Currently, manufacturers are hesitant to buy cocoa for immediate delivery, possibly increasing demand for future contracts.
Source: Bloomberg Finance LP, XTB
Source: Bloomberg Finance LP, XTB
Cocoa stocks are decreasing significantly, meaning producers will eventually need to increase demand for immediate or future deliveries. However, the market remains illiquid for now.
From a long-term perspective, the price drop means cocoa is not as expensive as in previous months. However, there is no clear buy signal from the averages, which remain clearly below the current price. Source: Bloomberg Finance LP, XTB
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