Cocoa’s Continued Supply Constraints

Cocoa continued to see supply constraints this month. The main growing region affected is West Africa - this area has been hit with large, strong, rainy storm fronts. When areas experience unseasonably high levels of precipitation we tend to the bean quality drop and an increase in black pod disease. When areas are hit hard by this disease, investors see rising cocoa futures prices. During trading times when weather premium becomes a large factor in a commodity’s outlook or price target, a potentially well-timed trade could be purchasing a call in a further out cocoa option - March 2024 for example.

Now that we know there could be more production issues down the line for cocoa, will the demand side help or hurt the cause? As of now, grindings are showing demand to be pretty weak. This pattern may cancel out the production issues we are seeing and may end up causing a range bound market for a month or two. We’ll have to wait and see how the remaining of quarter goes as we head into holiday season where corporate earnings will take center-stage.

Disclaimer: Past performance is not indicative of future returns. Opinions are my own. Profitable trades are not guaranteed.