• The cocoa market is back in the spotlight after selling off roughly 26% from its December 2024 high through the February 2025 low, so far. 

• Fundamentally the market remains bullish, as indicated by its forward curve continue to show backwardation. 

• If long-term investors start buying, it will likely be by adding new long futures positions rather than covering short futures. 

This past week, my longtime friend and MarketWatch commodities reporter Myra Saefong asked my thoughts on cocoa. After posting a red-hot 2024, with futures hitting a new all-time high of $12,931 (per metric ton), the market (CCH25) has cooled of late, and Myra was curious about three things: 1) Had the fundamentals of the market changed? 2) Did cocoa still look to be a buying opportunity for long-term investors? And 3) What did it mean for prices this Valentine’s Day? (Yes, for those of you who might’ve forgotten, Friday is indeed the latest Hallmark Holiday. This is your friendly reminder.) Let’s take these topics one at a time: 

Have cocoa’s fundamentals changed? Let’s begin with a quick discussion of what drove cocoa higher during 2024. Given cocoa is a weather derivative at heart (like the other ag production markets found in the Softs and Grains sectors), the source of last year’s historic move was indeed weather driven. El Nino’s harsh effects on West Africa, most notably Cote d’Ivoire – the world’s largest cocoa producer, reportedly accounting for 42% of global exports during 2023 – and Ghana. These two countries reportedly produce more then 50% of the world’s cocoa. With this as a backdrop, the market was primed for its historic, yet typical, short-term short-supply spike rally. 

The key difference between a supply-driven move and demand-driven move is time. When the latter develops it creates a long-term change in price expectations. One example is the corn market from the mid 2000s, and what has been seen since the Energy Policy Act of 2005 signed into law by US President George W. Bush. This policy was designed to “promote energy efficiency, renewable energy, and other energy sources”. (Sounds like Green Energy policy to me. Something the latest US president has outlawed.) This policy sparked increased buying in corn, doing away with the previous price range between roughly $2.00 (per bushel) and $3.50, creating higher expected prices over time. On the other hand, supply-driven markets are usually short-term, erased when the next harvest – with its new supplies – rolls around.

Cocoa harvest in West Africa occurs twice, between May through July (the rainy season) and October through March (the dry season). Given cocoa futures appear to have topped in mid-December 2024, the argument could be made this was due to the dry season harvest replenishing global supplies. But was it enough? It’s interesting to note the March-May futures spread has moved into a slight contango, though I think we have to set this aside given the commodities complex has recently gone through the Goldman Roll when funds moved long March positions to May. Cocoa’s forward curve remains in backwardation from the May issue through at least March 2026 indicating the long-term supply and demand situation is still bullish. 

Is this enough to keep long-term investors buying? Theoretically, yes. If algorithms are coded to pay attention to forward curves, and a particular market continues to show a long-term bullish supply and demand situation, from a mathematical (technical analysis?) point of view it could be said the market remains attractive to investors. The net-long futures position in cocoa hasn’t changed much of late, with the recent CFTC Commitments of Traders report showing a noncommercial net-long futures position of 35,390 contracts. What stands out to me here is how small the short futures position was at 13,083 contracts. This tells me if the noncommercial net-long is going to grow, it would likely come from new buying rather than short-covering. Again, this would fit with the still bullish long-term view of fundamentals laid out by the forward curve. 

Should investors be interested in cocoa? That depends on risk tolerance. Where does one try to buy into the market? If we are looking at the math, meaning the use of Fibonacci retracements as targets, where would we start the previous uptrend from? If we take it all the way back to the low of $2,192 from September 2022, then the initial Fibonacci retracement (23.6%) was $10,397, with the 38.2% level down at $8,829. But different algorithms could start the uptrend at different price levels meaning it could be difficult to project where Watson might have targets set. 

What did it mean for prices of chocolate goodies this Valentine’s Day? Honestly, I haven’t been to the store, but from what I’ve heard one has to fill out loan paperwork to buy quality chocolate items these days. (In my mind I see the typical new car scenario play out, “Wait here while I go visit with my manager.”) If we want to make a simplistic comparison, at the end of January 2024 the nearby futures contract was priced at $4,822 while the end of January 2025 saw the nearby futures contract settle at $10,967. This was a gain of 127%, not counting the market hit its new all-time high during December 2024.