While it has been hard to find a commodity in an uptrend lately, there is a new name on the list that may be due for higher prices. Just this month, cocoa broke above its four-year downtrend and appears to be holding its gains despite a slower outlook for the world economy.
Why are cocoa prices rising? There's a saying that the best cure for low prices is low prices and that is probably the best explanation for the cocoa market. Poor prices over the past two years have slowed efforts to expand production and discouraged farmers from the use of fertilizers and pesticides, resulting in a smaller harvest in the 2000-2001 season. World demand, in the meantime, has grown steadily, surpassing 3 million metric tons. The result is that ending stocks have fallen and are expected to fall more in the upcoming season. Some analysts are looking for the 2001-2002 stocks to use ratio to end up in the low 30's which would be the leanest situation since 1987.
Chocolate, most likely, will continue to see growing consumer demand with an improving world economy. The problem for this market will continue to be that Indonesia, Ghana, and Nigeria are too eager to expand production when prices are profitable. These governments, along with the Ivory Coast, need to reassess their production incentives to keep their markets more profitable. Even so, this appears to be one of those small windows of opportunity when cocoa prices have a chance to head higher. As always, there are no guarantees.
