Cocoa price prediction after entering the oversold zone

Cocoa price is on a downtrend following the ICCO’s monthly market report. The prevalent conditions in the key producers have further impacted prices. It is currently at a low last recorded in early August.  

Production outlook

Cocoa price has been on a week-long decline as the market digests the recently released market report by the International Cocoa Organization (ICCO). The agency expects global production to increase by 10% in the next decade. During this timeframe, cocoa price is forecasted to rise by 25%.

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Notably, grindings have increased significantly in North America, Europe, and South-East Asia. The Cocoa Association of Asia (CAA), European Cocoa Association (ECA), and North America’s National Confectioners’ Association (NCA) have had grindings rise by 4.1%, 8.7%, and 4.3% YoY respectively. Despite the increased grindings in Q3’21, “it was not enough to absorb the excess production.”

In the ensuing sessions, investors will also be keen on the prevalent conditions in key cocoa-growing areas within western Africa. In Ivory Coast, which is the leading producer of cocoa in the world, heavy rainfall has been recorded in recent weeks as harvesting commences. The resultant soil moisture is expected to boost the main crop associated with the October-March season. At this time of year, cocoa trees are usually heavy with pods and need adequate rainfall to get through the forthcoming dry season.  

In Ghana, which is the second-largest producer of the commodity globally, the cocoa swollen shoot virus has resulted in a decline in production below 800,000 tonnes. According to the CEO of the country’s cocoa board (COCOBOD), Joseph Aidoo, about 20% of the cocoa-growing areas nationwide has been affected by the virus. The situation will likely provide some support to cocoa price as COCOBOD strives to rehabilitate the affected regions.

A strong US dollar has further contributed to the downtrend observed in cocoa price. News of the latest COVID-19 variant – Omicron – has heightened the greenback’s safe-haven appeal. Over the past two weeks, the dollar index has remained steady above the crucial support zone of $95.50. In such an environment, cocoa becomes more expensive for buyers holding other currencies. Broadly speaking, commodities have an inverse correlation with the value of the US dollar.

Cocoa price prediction

Cocoa price is on a week-long decline after retesting a crucial resistance zone in the past week. 2,600 has been a key level for the agricultural commodity for over a decade. In the current year, cocoa in the Intercontinental Exchange (ICE) US futures market has been experiencing strong resistance at this zone.

At the time of writing, cocoa price was down by 1.05% to a four-month low at 2,353. On a four-hour chart, it is trading below the 25 and 50-day exponential moving; which is a bearish sign. Besides, it has entered the oversold territory with an RSI of 22. In the short term, I expect cocoa price to remain below the crucial resistance zone of 2,600.

It will likely go through a corrective rebound that will have it rise to 2,400. Subsequently, it may trade within a rather tight range of between the support level of 2,400 and along the 50-day EMA at 2,500. Above the horizontal channel’s upper border, the bulls will have another opportunity to retest the steadiness of the crucial resistance zone of 2,600. On the lower side, a move below 2,400 may place the support level at a four-month low of 2,306.