The impact of Brexit, and the result of the General Election in the UK next month, could impact the price of cocoa on the cocoa futures market, according to Andy Hecht, a leading analyst and futures trader.
In an article for Seeking Alpha, the world's largest investing community, Hecht said the price of cocoa can be “highly sensitive to the price action in the British pound versus other world currencies. The US dollar is the world's reserve currency, and cocoa futures on the Intercontinental Exchange use the dollar as the pricing mechanism. However, London has a long history as the hub of international cocoa trading. Many of the physical supply contracts use the British pound as a pricing mechanism. A strong pound tends to support the price of cocoa beans, while a weaker pound causes the price to decline”.
Hecht referred back to the Brexit referendum in the UK in June 2016, which caused the pound versus the US dollar relationship to drop from $1.50 to $1.20 by the end of that year.
The price of cocoa futures fell from over $3200 per ton in June 2016 to the low at $1769 per ton in June 2017. While abundant supplies weighed on the price, the collapse of the value of the pound versus the dollar added to the selling, he said.
If the UK were to leave the European Union with a deal, this will push up the value of the pound and a stronger pound would be another bullish factor for the price of cocoa beans over the coming months, Hecht predicted.
The trend in the cocoa futures market has been mostly bullish for more than a year, he said and “Since the turn of this century, the price range in the cocoa futures market has been from $674 to $3826 per ton.”
He said the weekly price momentum and relative strength indicators have been trending higher since August and September. In mid-August, the price of cocoa hit its most recent low at $2089 per ton.
Cocoa prices settled last week with Dec NY cocoa at a new 1-1/2 year nearest-futures high. Dec London cocoa posted a 3-year nearest-futures high last Thursday after the International Cocoa Organization (ICCO) said the global cocoa market in 2020/21 will have a "very small" deficit of -50,000 MT and that it expects cocoa prices to continue to climb, partly due to the discussion of the ‘living income differential’ in Cote d’Ivoire and Ghana, as well as rising global consumption.
Latest trade on Monday (18 November) was 2,760.00USD per ton and cocoa prices also found support from Olam Cocoa’s projection last week for global cocoa demand to strengthen with global chocolate consumption rising to 7.2 MMT by 2023/24 from 6.0 MMT in 2017/18. (Source: Barchart)
- Andy Hecht is also the author of the weekly Hecht Commodity Report on Marketplace - the most comprehensive, deep-dive commodities report available on Seeking Alpha.