A busy start to the week for the cocoa market

After a consolidation period, cocoa futures posted strong gains in New York and London, closing the July 6 session at 5,694 USD/t and 4,222 GBP/t, respectively, after reaching a six-month high. The macroeconomic outlook and supply concerns supported technical price movements, while the market continues to await new fundamental data related to demand out next week.

Regarding the macroeconomic outlook, the slowdown in the U.S. labor market, evidenced by the release of nonfarm payroll data well below expectations in June, led financial market participants to reduce their expectations for further interest rate hikes by the Federal Reserve in the short term. In addition, a bearish sentiment regarding the dollar may have affected the commodities market, supporting gains in various assets during the trading session on Monday, July 6. It is also worth noting that the resumption of trading after Friday’s break due to the July 4 holiday in the United States may have contributed to market volatility.

For agricultural commodities, in addition to the factors mentioned, the potential El Niño impacts continue to support the market. The United Nations meteorological agency has raised its forecast for the rapid development of a strong El Niño event, which increases the likelihood of intense weather events, raising the risks of severe weather and its potential effects on global agricultural production. For the cocoa market, it is worth emphasizing that the impacts depend on the intensity of El Niño and how the phenomenon will influence regional events, such as the West African monsoon and the Harmattan winds.

Regarding short-term weather, as discussed in the previous analysis, excessive rainfall and high cloud cover in key producing regions of Ivory Coast, along with reports of below-average fruit set rate, have raised concerns about the harvest timeline and an increased incidence of disease. In Ghana, where accumulated precipitation has been above average since January, the recent intensification of rains may also pose risks to the 26/27 crop. The combination of these factors, which could result in a slower start to the next cycle in the two main producing regions, continues to support prices. Still, below-average rainfall recorded in some Ivory Coast regions over the past week, a pattern that is expected to persist in the coming days according to weather forecasts, may help alleviate some of the concerns related to excess moisture. In Ghana, lower rainfall was also observed during the same period.

All these elements contributed to technical market moves, which ultimately acted as the main catalyst for the rally. Changes in open interest, combined with rising prices, suggest both a move to cover short positions and the entry of new buyers, reinforcing a more bullish bias in the short term. This interpretation is supported by positioning data, which showed a reduction in speculators’ net short positions on both ICE US and ICE Europe for the week ending June 30. At the same time, the increase in positions held by commercial participants indicates an increase in hedging activity and participation from the physical market. Taken together, these movements suggest that recent market movements were driven not only by the closing of short positions but also by increased participation from market agents.

Despite this scenario, the Relative Strength Index in both markets remains at overbought levels, which could lead to consolidation or corrections in the coming days. In this regard, prices closed the July 7 session still higher, albeit with much less significant gains than those observed the previous day in New York and London. During the July 8 trading session, prices rose again, still driven by the factors discussed.

Despite supply concerns, demand will continue to be a key factor in determining the 26/27 crop balance, as much of the market still projects a surplus for the upcoming cycle. Market participants are awaiting the release of grinding results from the main processing regions next week. If the figures show mixed performance across regions, bullish sentiment could gain momentum in the short to medium term. On the other hand, results confirming weak demand persistence could lead to price corrections. 

Cocoa futures saw a strong rise on July 6, reaching their highest levels in six months in New York and London. The rally was driven by a combination of macroeconomic factors, persistent supply concerns in West Africa, and weather risks associated with El Niño, which continue to create uncertainty for agricultural production and provide support for prices.

In the cocoa market, attention remains focused on weather conditions in Ivory Coast and Ghana, where excessive rainfall and high cloud cover could jeopardize the development of the 26/27 crop. In addition to fundamentals, technical factors have also contributed to recent price movements, with a reduction in speculators’ net short positions and an increase in commercial traders participation. Despite the short-term bullish bias, the market remains focused on next week’s grinding results, which will be key to assessing the demand strength and the sustainability of the rally.