• The nearby Cocoa futures contract hit its all-time high in mid-December 2024, due in large part to smaller harvests due to weather problems in West Africa. 

• However, short-supply spike rallies tend to end with the next harvest season, which in the case of cocoa tends to be in May. 

• Noncommercial traders have generally moved to the sidelines, indicated by little change in their long, short, and net futures positions. 

I had a question come in about the cocoa market. It has been a while since I wrote about the Softs sector, with my previous piece pointing out how many of these markets could stay in favor with long-term investors given the markets’ backwardated (inverted) forward curves. As we approach the end of January 2025, let’s take a look at the structure of the cocoa market to see if it is still “hot”. 

What do I mean by structural analysis? Commodity markets have two sides: Noncommercial (funds, long-term investors, etc.) and Commercial (those actually involved with the trade of the cash commodity). We can read the views of both sides by looking at difference aspects of the market, most notably trends. Here we can apply Newton’s First Law of Motion applied to markets (A trending market will stay in that trend until acted upon by an outside force) and Newsom’s Market Rule #1 (Don’t get crossways with the trend). 

Additionally, the two sides don’t have to agree. When we see a divergence, Newsom’s Market Rule #6 comes into play: Fundamentals win in the end. With that in mind, let’s take a look at cocoa.

The Noncommercial Side: From a technical point of view, the continuous weekly chart for the nearby futures contract is showing a consolidation pattern. As of last Friday’s close (January 17), I do not see a clear bearish reversal pattern. Given the long-term investment side is driven by mostly by algorithms these days, and a key component of most trading programs is momentum, the more reliable intermediate-term reversal pattern I look for is new 4-week highs or lows. In the case of cocoa heading into this week, that puts resistance at $12,050 and support at $9,831. The March contract (CCH25) closed last Friday at $11,173. 

A look at the latest CFTC Commitments of Traders report (legacy, futures only) shows noncommercial traders held a net-long futures position of 36,860 contracts as of Tuesday, January 14, an increase of 1,066 contracts from the previous week. This included an increase in long futures of 487 contracts and a decrease of short futures by 579 contracts. However, note the trends of three different positions (long futures (green line), short futures (red line), net futures (blue line)) are generally moving sideways as well. This indicates there is some indecision, or possibly indifference, on the investment side of the market. After making its historic run to a new all-time high of $12,931 in mid-December, Watson may look at cocoa as overpriced until indicated otherwise by the market’s real fundamentals. Which brings us to…

The Commercial Side: A look at the market’s forward curve shows futures spreads are still in backwardation (inverted) at least through the July 2026 futures contract. This continues to indicate the commercial side holds a bullish long-term view of real supply and demand, though far deferred spreads could have an asterisk applied to them given a lack of open interest and trade volume. Is it enough to start drawing more attention from investment traders? We’ll see. 

Shorter-term, the March issue is seeing continued commercial selling. We know this by looking at the daily close-only chart for the March-May futures spread. After posting a high daily close of $885 backwardation on December 23, the spread closed last Friday at $339 backwardation. Yes, the spread is still bullish for as Dr. Seuss’ Horton the Elephant taught us about storable commodities, “A backwardation (inverse) is a backwardation no matter how small”. But we can see the commercial view is not as bullish as it was. 

Why? Newsom’s Market Rule #5 reminds us, “It’s the what, not the why”, meaning it is more important to see what the two different sides of a market are doing rather than trying to guess why. But if we were to start making guesses, I would lead with seasonality. The world got through the smaller 2024 harvests, particularly in Cote d’Ivoire and Ghana where adverse weather has continued to play a key role in reducing supplies. Second, the holiday season has come and gone meaning the usual surge in demand, particularly from Europe, has subsided somewhat. Third, the nature of a short-supply spike rally is that it tends to come to an end with the next harvest. In the case of cocoa, there are two main harvests periods: From May to July and October through March. Or in other words, nearly year-round (similar to wheat). Therefore, the most recent crop reductions have likely been priced into the March futures contract, putting the spotlight on the next harvest. For the record, the May-July futures spread is trending sideways at a solid backwardation on its daily close only chart showing continued bullishness from the commercial side. 

When we talk about the commercial view, futures spreads cover all the factors that can influence supply and demand. I’ve previously talked about how cocoa is a weather derivative, like the other agriculture production markets, but there are other influences like pests, disease, etc. that are also accounted for. The bottom line in cocoa as we look ahead to the next harvest cycle is a continued concern over supplies in relation to demand. This could spark a new round of buying from funds as we make our way through 2025.