The cocoa market was the strongest performing commodity of 2023, with London cocoa finishing 2023 up 70%, while US cocoa futures rallied a little more than 61% last year. The relentless move higher has only continued into 2024, with US cocoa futures up a further 39% so far this year, while London cocoa has rallied by an additional 37%. Both contracts have hit new record highs this year.
Concerns over West African supply, specifically in Côte d’Ivoire (Ivory Coast) and Ghana, have driven the market higher. The bullish narrative has attracted participants into the market, with aggregate open interest in London cocoa surging above 400k lots in December, although admittedly, it has fallen back towards 350k lots more recently. However, this is still above the 2018-22 average of around 270k lots.
But looking at positioning data and specifically the managed money (speculative) category for London cocoa, there has not been a significant increase in buying. In fact, the managed money gross long has decreased from roughly 105k lots in May last year to around 64k lots currently. Instead, the squeeze appears to have been driven by commercial players, where the gross long position has increased from around 119k lots in February last year to more than 290k lots currently. Whether this is an intentional squeeze or not is less clear. If it is, it wouldn’t be the first time the cocoa market has experienced one. Although supply shortfalls could be seeing some suppliers/traders needing to find alternative supplies in order to meet contractual obligations, the uncertainty over how much higher prices could go may also be seeing some physical buyers rushing in to lock in prices.
The key question, and also the toughest, is how much higher cocoa prices can go. They need to go to levels where we start to see significant demand destruction. We are already seeing some of that already, but clearly not enough to bring the market back into balance and ease tightness concerns.
