A Little Cuckoo in Cocoa ETF?

Looking for an investment tied to insatiable demand and tightening supply, with a little geopolitical instability rattling the supply chain for added fun? 

Cocoa, those golden beans from West African rainforests—harvested, fermented and transported in extremely hands-on processes—might be worth a look. 

The iPath Bloomberg Cocoa Subindex Total Return ETN (NIB) tracks the cocoa futures contract on the Intercontinental Exchange.  

Cocoa is one of the “soft commodities,” along with sugar, coffee, cotton and frozen concentrated orange juice. While Brazil is the leading producer of most softs, West Africa dominates annual cocoa bean output.  

Source: Statista 

The chart highlights that Ivory Coast is consistently the leading world cocoa bean producer, with Ghana second. The West African equatorial climate supports cocoa bean production.  

Cocoa prices recently reached a multiyear high and experienced a technical upside break on the weekly chart.  

Cocoa Moves Above $3,200 

Since early 2022, cotton, sugar and coffee futures have risen to the highest prices since 2011. Frozen concentrated orange juice reached a new record high. Cocoa was the laggard, but the soft commodity that is the primary ingredient in chocolate broke out to the upside, reaching a multiyear peak in April. 

Source: Barchart 

Cocoa didn’t reach its highest price since 2011, but traded at a $3,279 high, a level not seen since December 2015. The 20-year chart shows a bullish pattern of higher highs since establishing a bottom at $1,769 per ton in June 2017.  

Defaults in Cocoa Deliveries? 

Equatorial West Africa has the ideal climate for cocoa to thrive. In March 2023, Fitch Solutions wrote, “We expect ongoing concerns over tight supplies to continue supporting prices, with reports emerging of the Cote d’Ivoire exporters near to defaulting on contracts due to insufficient cocoa bean supply.” 

Cocoa producers in Africa and worldwide face the same inflation that is impacting all agricultural commodity production. As input costs rise, output prices increase. The highest inflation in decades raises labor, financing, equipment, transportation and other related production costs. Cocoa prices remained stable until recently, and increasing costs likely caused producers to limit expenditures by reducing plantings.  

Ivory Coast Buying Restrictions 

Ivory Coast turned down Cargill and Barry Callebaut, two of the world’s leading chocolate manufacturers, on requests for more cocoa beans. Le Conseil Cafe Cacao, or CCC, Ivory Coast’s regulatory body, restricted the multinational traders from additional export bean purchases to avoid a shortage. Cargill and Barry Callebaut had already reached amounts stipulated in supply contracts.  

Barry Callebaut is a leader in high quality chocolate products and Cargill offers a range of cocoa and chocolate varieties and specialty items in its manufacturing portfolio. The two companies are not likely alone in this situation, as other top chocolate manufacturers could have issues securing cocoa beans in the current environment.   

Target Is 2011 Peak 

Sugar, coffee and cotton futures rallied to the highest prices since 2011, while frozen concentrated orange juice reached record heights. If the cocoa market continues to follow the other soft commodities, the 2011 high could be the $3,826 per ton target.  

Nearby July futures were at the $2,954 level on May 5, so a move to challenge the 2011 high would take the soft commodity nearly 30% higher. Agricultural products can be highly volatile: 

• World sugar futures moved more than 200% higher from the 2020 9.05 low to the most recent high at 27.41 cents per pound.  
• Arabica coffee futures rose 181% from the 92.70 cents 2020 low to the $2.6045 February 2022 high.  
• Nearby cotton futures exploded 227% higher from 48.35 cents in April 2020 to $1.5802 in May 2022.  
• FCOJ futures rose 216% from 91.20 cents in early 2020 to $2.8790 per pound in April 2023.  

A 100% move in cocoa from the 2020 $2,115 low would take the continuous futures price far above the 2011 $3,826 high to over $4,000 per ton.  

NIB Moves With Cocoa Prices  

The most direct route for a risk position in cocoa is via the ICE futures and futures options market. NIB provides an alternative for those seeking cocoa exposure without venturing into the futures arena.  

At $33.73 per share on May 12, NIB had $15.66 million in assets under management. NIB trades an average of 11,985 shares daily and charges a 0.70% expense ratio.  

Nearby ICE cocoa prices rose from $2,192 in late September 2022 to $3,279 per ton in April 2023, a nearly 50% increase.   

Source: etf.com 

Over the same period, NIB moved from $23.02 to $34.69 per share, or over 50%, as it did an excellent job tracking the nearby cocoa futures price.  

Chocoholics worldwide continue to require a chocolate fix, making cocoa demand less elastic than other commodities. A rising cocoa price will not likely deter chocolate consumption, as chocoholics are united in their never-ending addiction to the epicurean delight.