Cacao Market Update

Macro and Forex

US dollar: If we look at the absolute figures of the US dollar, 2022 has been a great year, where the American currency has strengthened by over +8% if we base it on the US dollar index. One of the biggest factors in this strengthening has been the stance of the FED regarding interest rate hikes, where they have been leading this aspect. The FED has raised 425 basis points, even making it clear at its last meeting that it would continue to raise rates and would keep them at maximum levels until inflation showed signs of a lasting fall and it approaches the inflation target. Prices already stood at +7.1% in November in comparison with last year, after its peak of +9.1%, and have shown signs of weakening in recent months. Largely due to the fall in energy prices because of a "warm" winter in many parts of the world. Despite the good year for the US dollar, since September the currency has depreciated nearly -8% from its peak, partly due to the unwinding of speculative buying positions and finally to the slowdown in the pace of interest rate hikes, which some consider a "pivot" on the FED strategy. This last and softer rate hike was also replicated by the BOE and the ECB, but with different nuances. What they made clear at the Fed is that rates will continue to rise as necessary despite the adverse effects. Effects that are already beginning to be felt, as we commented in previous reports, where we see a shrinking manufacturing industry and services sector, as well as a fall in the housing market. The American economy is slowing (like most economies) but the IMF believes will weather the storm better than most.

Euro: The ECB found it hard to follow the Fed and the BOE in raising rates. The ECB's speeches in late 2021 and early 2022 showed some caution in taking any action in this regard, because they considered inflation to be transitory in nature, and probably even if they did not say so, they feared that fragile post-pandemic economic growth would be destroyed by an early rate hike. This discourse has changed dramatically during 2022 and already at their last meeting in December, after raising 50 basis points following the Fed's lead, they sent a clear "hawkish" message indicating the importance of controlling inflation. Where the necessary measures would be taken in terms of rates to control it. Despite this "late" reaction by the ECB, they have raised rates by 250 basis points, reaching, for now, the highest rates in 14 years. Inflation in Europe has also shown signs of easing, but less than in the US, and stood at +10.1% in November. Far from the +2% target and distant from the US +7.1%. As for the +2% target, according to ECB forecasts, it will still take a couple of years to reach it, as they expect average inflation in the euro area to be +6.3% in 2023, +3.4% in 2024, and +2.3% in 2025. In any case, the euro has also benefited from the weakness of the US dollar and the pound in recent months to gain momentum. Another aspect that has improved expectations, in part, for the European?economy is the fall in energy prices in recent months, which could mean that in the event of a recession, which many already believe to be certain if it occurs, it will be milder than expected a few months ago. This, together with the ECB's stance in the last stretch of the year has served as support for the euro.

GBP: Of the three currencies analyzed, sterling has been the most volatile during 2022. Successive episodes on Downing Street brought considerable volatility during Boris Johnson's command and reached their volatile peak during Liz Truss's short stay as British Prime Minister. The BOE began to follow the Fed's lead in hiking interest rates early on, with less aggressive but more consistent hikes. The main issue is the doubts generated by the British economy, due to high inflation, and the markets' understanding that interest rate hikes, which they find at +3.5%, could deepen. Of the three central banks, the BOE certainly showed more signs of starting to halt rate hikes in the immediate future than the others. In fact, in the last votes within the Bank of England, there were supporters of not raising rates at the last meeting. As for inflation, it fell to +10.7 in November after reaching a 41-year high in October. The beginning of the road, although far from the BOE's target.

Cacao Production Countries

Ivory Coast

Cocoa arrivals at ports in the World’s top grower reached 1.259 million tonnes by 1st January since the start of the season on the 1st of October, up +13.7% from the same period last year. Ivory Coast’s cocoa grindings were 55,248 tonnes in November, up +5.1% YoY. Total grind from the start of the 2022/23 season in October reached 113,803 tonnes by the end of November, up 6,9% from the same period last year.

Ghana

More news about the dramatic situation of Ghana’s economy appears this month. Their interest payments currently cost between +70% and +100% of government revenues.

Other producing countries/regions:

Ecuador – No further news available

Cameroon – No further news available

Nigeria

Nigeria exported 16.013 tonnes of raw cocoa beans in October, down -21.5% from the same period last year.

Congo – No further news available

Brazil – No further news available

Asia – No further news available

Weather News

Early this month began with good soil moisture that compensated for the dry sunny weather in months of Ivory Coast’s cocoa-growing regions. Soil moisture was high enough to guarantee the main crop over the next two months. The dry Harmattan wind blows from the Sahara Desert for a variable period between December and March and can damage the crop when it is strong. In the last quarter of the year 2022, dry winds of Harmattan and low rainfall appear in most of the cocoa-growing areas of Ivory Coast and Ghana. If no rain continues with dry winds could damage the quality of the April to September mid-crop. Furthermore, without good rainfall in the coming days, the last stage of the main crop could be of poor quality.

Market Overview

December is usually a different month due to the fact that there are usually several terminal closure days, many participants take holidays and there is usually little volume worked in the market, which can sometimes bring some volatility. This year, the lower volumes came in anticipation of the Christmas period and for much of the month, we have seen in both London and New York terminals that there was very little interest in cocoa. The reasons for this may be a bit of a lack of news, especially during the first half of the month, and on the other hand some fatigue in the market after the strong rally of the December 22 position before it disappeared.

Looking at the December 22 position’s performance there was some question in the air as to whether this pressure seen in the first position would carry over to the March 23 as a new first position, although so far it does not appear to be the case. The market continued to hold up in December and we saw another attempt to break the ￡2,000 barrier in the second position on May 23. The Ivory Coast harvest has continued at a good pace, already up over +11% on the previous year, but one would have to take into account the extra volume that may be passing into the Ivorian country from Ghana this year. Something that normally used to be the opposite. Despite good arrivals at ports in C?te d'Ivoire, grain exports appear to have fallen by around -46% in the country in October and November. This, given the previous poor mid-crop, may have created some tension for buyers in other countries who may be short of beans. Another possible reason why the market may have risen strongly on Dec 22. Related to this, in the Dec 22 position, a total of 82,770 tonnes were delivered in the London terminal. A very high figure indeed. There are several theories about this, from possible participants who were short of beans and needed them immediately, others who were looking for a lower cost alternative compared to origin current differentials, and also some possible speculators. Whatever the reason, it also helped to explain part of the rise in the price of Dec 22. As mentioned above, once the Dec 22 position disappeared, the market, despite rising, was somewhat sluggish ahead of the Christmas period. Probably many were waiting for the grindings data, which could be positive overall, but perhaps closer to zero growth than the growth rates seen in the previous quarter. Demand seems to be still good attending the ratios of products, but there are some rumors about big chocolate companies seeing some declines in their sales. The numbers will speak at the time. For the time being, a small deficit (between -40,000 and -70,000 tonnes) is still being forecast for the current season, and the lack of rain in the second half of December and the appearance of Harmattan are causing some concerns in Ivory Coast. On a speculative level, the funds in London, after a small cutback, seem to be back on the bullish side of the market, although it is true that they are already quite long (overbought) and do not have much room left on that side. But with the market in backwardation, they are comfortable in their positions. What would be a more notable change is the stance of the NY funds who seem to have left their net short position and seem to have a more bullish outlook on the market. This can be seen in the $300 rise in the NY terminal during the month of December, also taking into account the help of a dollar that lost considerable strength during the last few months of the year.

Cocoa Chart ICE London – May 2023 (K23)

On the London second position chart, we have some interesting points. Firstly, as we can see a gap was created in the price due to the second position moving from March 23 to May 23, with the disappearance of December 22. As the market is in a clear backwardation, there was a difference between positions on March 23 and May 23 at that time of change of about 40 pounds. This created the gap marked with the red oval. Theory tells us that the market tends to close gaps, either like the one explained or when there are large differences between a close and an opening the following day. In this case, this is not always the case, the gap closed in just a few sessions, implying that the price target for the nearby positions was clearly above ￡1. 900. Another interesting point is the ￡2,000 resistance, a clear psychological barrier in the market and which also joined the old bullish channel (marked with the green lines), generating a wall that it broke through slightly in one session but could not break through and close above in December (but it could in January). The 50-day moving average, marked in blue, has flattened out. Sign of this sideways period in which the London market has been since November.

In the case of New York, a "Golden cross" pattern occurred on 22 December (when the 50-day moving average crosses the 200-day moving average from below), which was confirmed in the following days. This is a bullish indicative pattern. On the other hand, the market has continued to move higher after a more sideways-looking period during much of November and mid-December. However, if we look at it with more perspective it simply needed some more work to break through resistance. In the middle of the month, the price encountered the $2,540 level, a resistance that had been generated in May 2022 and which the market encountered again. It took several attempts to break this level. This was subsequently achieved. Despite not having the bullish momentum seen in November, the chart continues to build in a bullish manner. The currency factor has also had quite an impact on the NY terminal over the last few months.

Cocoa Products Overview

December continued with the same trend seen in the last months with no major changes in product ratios as demand has been very regular and very well supported.

Liquor: Ratios have stabilized and continued well supported.

Butter: Prices continue well supported, we could see higher prices in the next months.

Solids (Cake/Powder): Cake prices at origin and powder prices continue very well supported with no major changes in the past month.?