Is Cocoa at the Bottom End of a Trading Range?

(Seeking Alpha) – Only commodities traders think about the price of cocoa beans when they tuck into a delicious chocolate treat. Cocoa is a member of the soft or tropical sector of agricultural raw materials because growing the beans require specific conditions. Cocoa beans thrive in equatorial climates within a matter of miles from the equator. Therefore, the two primary producing nations in the world that provide over 60% of the cocoa beans required to make chocolate are the West African nations of the Ivory Coast and Ghana.

While many of the economies in the Middle East, home to over 50% of the world’s oil reserves depend on the price of petroleum, the West African economy revolves around the business of growing and transporting cocoa beans. There other producing nations in the world including Indonesia, Nigeria, Cameroon, Brazil, Ecuador, and Mexico. However, the Cote d’Ivoire and Ghana provide the lifeblood of supplies to consumers across the globe each year.

Like all agricultural commodities, weather and crop diseases can cause lots of volatility when it comes to supplies each year. The fact that production is concentrated in West Africa only adds to the price volatility in the international cocoa market.

Lots of volatility over a two-year period

The cocoa market has been on a wild ride since December 2015.

In December 2015, the nearby ICE cocoa futures contract hit its most recent peak at $3422 per ton. Over the next year and one-half, the price moved progressively lower hitting rock bottom in June 2017 at $1769, the lowest level since August 2007. The 50 percent retracement level of the move from the December 2015 high to the June 2017 low stood at $2595.50 per ton. In March 2018, the price of cocoa bean futures blew through that level like a hot knife through butter reaching a peak at $2914 in May. Dry conditions in Ghana took the price of cocoa higher.