Cocoa Market Experiences Second Crash in Recent Weeks Due to Drying Liquidity

Another Cocoa Crash in New York

The cocoa futures market in New York has experienced a second crash within a short span of time as liquidity continues to dry up. A new weather forecast indicating improved weather conditions for the major cocoa producers in West Africa has also contributed to this development.

The most active cocoa contract in New York saw a 19% drop on Monday, although it did manage to recover some of its losses on Tuesday, rising by about 5%. This comes after the cocoa market crash on May 1, which saw an 18% drop.

Rollercoaster Price Action Continues

Cocoa prices have been on a rollercoaster ride, retracing at the 61.8% Fibo level from this year's record surge from $4,000 a ton to $12,000. This volatile price action has resulted in a higher 60-day historical volatility.

According to Bloomberg, the latest cocoa crash was driven by a weather forecast predicting increased rainfall, which would boost crop outlooks, and a low open interest in the cocoa markets.

Improved Weather Conditions for Cocoa Producers

Donald Keeney, a senior meteorologist at Maxar Technologies, stated that the rains "should improve conditions quite a bit" in Ghana, the world's second-largest cocoa producer, and Indonesia. He also mentioned that the Ivory Coast, the top cocoa producer, would also receive rainfall. However, he stressed that more precipitation is needed to reverse the arid conditions in the world's top cocoa-producing farms.

Concerns and Challenges in the Cocoa Market

Producers in the Ivory Coast are concerned that thunderstorms may damage the few flowers on trees and hinder plant growth. The mid-crop harvest in southeast Ivory Coast is smaller compared to last year. Furthermore, the rains have made it difficult to transport beans to Ivorian cities, and smuggling continues to be an issue due to better prices across the border. In Cameroon, bean theft is becoming a growing problem, leading farmers to dry beans for a shorter period, potentially impacting the quality.

Forecast for Cocoa Prices

Rabobank analyst Paul Joules recently stated that cocoa prices have likely reached their peak. He explained that a combination of weakening global demand and production responses, especially from countries without a fixed farmgate price, will help alleviate the pronounced uncertainty in current futures pricing. However, he also noted that inflated cocoa prices are likely to persist for the next few years.

Meanwhile, commodity trader Pierre Andurand remains firm on his $20,000 price target for later this year.

Final Thoughts

The cocoa market is in a state of flux, with prices fluctuating wildly and liquidity drying up. This situation presents both challenges and opportunities for producers, traders, and consumers alike. It will be interesting to see how the market evolves in the coming months and years. What are your thoughts on this development? Feel free to share this article with your friends and discuss it. Also, don't forget to sign up for the Daily Briefing, which is available every day at 6pm.