SIKAKROM with Gideon Donkor: Cocoa price crash and Cocobod’s challenge

Cocoa prices in New York and London have declined by more than 30 percent since the beginning of the year, reaching their lowest levels in two years following a sustained two-week sell-off. Ongoing concerns regarding demand are exerting downward pressure on cocoa prices, as consumers react to elevated chocolate costs. Over a two-day period, prices dropped by as much as 18% before settling at $4,450 per metric ton. This recent decrease extends the significant correction that began last year, when prices fell over 50% at the start of the year, driven by reduced demand and increased supply from West Africa in the aftermath of El Niño.

From year’s high of $11,711/mt in early January, cocoa prices declined steadily until Bloomberg announced in mid-November that cocoa futures would be added to its commodity index (BCOM). This announcement sparked a price rally, elevating values from $5,000/mt to $6,300/mt as market participants anticipated increased demand from index funds. Speculators expanded their long positions in advance of the expected index rebalancing, but exporters took advantage of the higher price levels to hedge, which tempered the rally. Following the official addition of futures to the index on January 14th, it was anticipated that some degree of post-inclusion selling would take place, primarily due to profit-taking by speculators who had established positions prior to index fund participation. Nonetheless, there remained an expectation that sustained long-term fund allocations would provide support for prices, helping them remain above $5,000 per metric ton. The latest selling wave indicates that speculators have outweighed the influence of index funds as they prepare for potential continued market weakness.

The recent downward movement in price appears to be driven by a series of negative developments pointing to weakening market fundamentals. On Wednesday, Barry Callebaut AG, recognized as the world’s largest producer of bulk chocolate, reported a 12% annual decline in sales volume within its cocoa division. While global fourth-quarter cocoa grinding data has yielded mixed results, the overall outlook remains largely unfavorable. In Europe, grindings decreased by 8.3%, significantly exceeding the projected decline of 2.9%. Conversely, Asian grindings outperformed expectations, registering only a 4.8% drop against the anticipated 12%, thus providing some positive counterbalance. In North America, grindings saw a marginal increase of 0.3% but with the addition of two new reporting plants.

The technical side does not offer much respite. Cocoa futures show significant open interest, with nearly 50% in the March 2026 (CCH26) contract. The high open interest that is concentrated in the front month coupled with a rapidly falling price suggests a strong, sustained downward trend, potentially driven by new shorts or longs liquidating positions in response to poor demand data and anticipated surplus in West Africa. For those seeking an optimistic outlook, the Relative Strength Index (RSI) for the Cocoa March 2026 contract (CCH26) stands at approximately 26.80, while the #7 London Cocoa March 2026 contract (CAH26) records an RSI of 25.41. As both values are below 30, this indicates oversold conditions and suggests the potential for a rebound. Additionally, any near-term weakening of the dollar resulting from developments coming out of Davos may prompt some short covering in cocoa futures.

There is still some risk of large swing in prices in late February as we approach the settlement date for March-dated contracts. During this time, traders usually adjust their risk exposures, which often leads to decreased market liquidity. Institutional funds recalibrate their portfolios based on projected risks, while options dealers and physical cocoa buyers rebalance their hedging strategies. Such adjustments tend to heighten market volatility, with small market imbalances potentially leading to significant price swings. If prices travel through a major threshold like $4,300/mt and those pricing areas happen to have heavy concentrations of options positions, forced selling may intensify price movements due to reflexivity and gamma-related effects. For those less familiar with financial derivatives, “Delta” indicates the sensitivity of a cocoa options contract’s price to a $1 change in the cocoa price, whereas “Gamma” reflects the rate at which Delta changes relative to movements in cocoa prices. Dealers generally hold short positions in options, making them effectively long on volatility. They therefore Delta hedge to keep the position neutral to small changes in prices and Gamma hedge the Delta to protect against larger swings in prices. When dealers become short gamma, commonly around options expiration, they are compelled to purchase as prices rise—amplifying rallies—or sell as prices fall—intensifying declines—thereby reinforcing market reflexivity. Notably, when substantial gamma exposure coincides with sustained selling, the result can be a continued decrease in prices, independent of fundamental market conditions.

Looking ahead, the market remains bearish as participants monitor both macroeconomic factors and the evolving supply outlook. Weather patterns in West Africa, US dollar fluctuations, and shifts in global demand will continue to play pivotal roles in shaping price action. Furthermore, the interplay between speculative trading and actual physical demand could amplify short-term volatility, making it crucial for stakeholders to stay vigilant amid changing market dynamics.

What does this mean for Cocobod, Ghana’s leading exporter? Simply put, things do not look good. Our article last week highlighted that Cocobod has been struggling with poorly structured forward contracts from previous leadership. We speculated that the company needs cocoa prices to average around $5,350 per metric ton for the rest of the season just to break even, but prices have fallen far below that level. This probably indicates that Cocobod is experiencing losses, which may lead to difficulties securing funds to purchase cocoa. Reuters reports that some cocoa farmers have remained unpaid since last November.

Cocobod’s operations go beyond simply buying beans for local and international sales. In fact, their primary activities involve managing two hedge portfolios: one for cocoa and another for cross-currency transactions. Alongside its usual forward sales (short) of cocoa, it also makes forward purchases (long) by committing to buy all cocoa delivered by farmers during the season at a predetermined price. By establishing the farmgate price, Cocobod commits to purchasing unlimited quantities of cocoa at the specified rate. This arrangement has typically functioned without significant complications, as the farmgate price is generally set well below the prevailing global market price, enabling Cocobod to effectively navigate market fluctuations. Furthermore, Cocobod oversees a foreign currency trading portfolio. While farmers are compensated in Ghanaian cedis, revenues from buyers are received in U.S. dollars, resulting in a short position in cedis and a long position in dollars. Historically, this structure has been beneficial—a scenario known as “right-way risk”—as the consistent annual depreciation of the cedi has allowed Cocobod to capitalize on favorable exchange rate movements.

This year the large price drop has eroded the buffer that the company creates by fixing the price paid to farmers as a percentage of the anticipated global prices and the currency has reversed direction by appreciating. The farmgate price was set at GH¢58,000 at the end of September, but global cocoa prices have since dropped by more than 40 percent and the price to buy cedis with dollars has gone up by 35 percent. The net result is, Cocobod has committed to buying cocoa for the rest of the season at $5,345 per metric ton while earning less than $4,500 per metric ton based on recent prices.  The open-ended commitment to buying all cocoa presented for sale will soon magnify its financial exposure. Soon market prices in neighboring countries are expected to be significantly below Ghana’s farm gate rate. If global cocoa prices continue to decline, Ghana may become a preferred destination for cocoa sales, which could contribute to reverse smuggling activities. This situation has the potential to substantially raise the volume of cocoa supplied to Cocobod, thereby amplifying financial losses. Ironically Cocobod’s difficulties in providing prompt payments may act as a deterrent for sellers considering Ghana as a market for their produce.

A solution I see is for Cocobod to reconsider its commitments to farmers. While parties to financial contracts usually cannot withdraw without penalties or costs, there is no formal agreement with the farmers—only a promise to purchase cocoa at farm gate prices, which can be broken without financial repercussions. However, this approach carries a political cost of alienating about one million farmers that the government may be unwilling to pay. To borrow Bane’s words to Batman: “What breaks first, your spirit or your body?” Cocobod faces a similar dilemma: will it be their balance sheet or the government’s popularity that breaks? Let’s not forget, the core purpose of a marketing board is to protect farmers from these types of global price swings that we have seen in the last few years. If it cannot do so, then what is the point of its existence? Just asking for a friend.

Gideon Donkor, an avid reader, dog lover, foodie, closet sports genius but a non-financial expert

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