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Cocoa Prices Could Rise Sharply and Hurt Food Companies

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Trend in the cocoa price

Cocoa futures prices for March 2016 expiry were trading above the key support level of $2,905 per metric ton on January 15, 2016. The volatile price movement continued for the third consecutive day and raised prices. The volumes of the contract also rose by 1.9% on the day, but open interest continued to fall by 2.4% for the straight ninth trading day. On January 15, crucial moving averages continued to remain higher than the current price level since 12 trading days. Amid the lower supply sentiment, prices could rise sharply in the near term.

The graph above suggests that cocoa prices could oscillate in the range of 2930 and 2840 US dollars per metric ton in the short run.

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Price drivers

The lower cocoa production sentiment, from less-than-required precipitation, supported the price movements due to high demand. The strong cocoa price rise sentiment received support from the U.S. Commodity Futures Trading Commission’s weekly Commitment of Traders report for the week ending January 12, 2016. Cocoa prices in the South Asian countries were stable due to lower supply and sluggish demand.

Stock review

The rise in the cocoa prices could hurt food and beverage companies as it raises the cost of inputs. Dean Foods (DF) and Mondelez International (MDLZ) fell by 1.1% and 2.5%, respectively, on January 15, 2016. These shares sharpened in the downward price movement from the previous fall on January 13. The prices of Hershey (HSY) and Starbucks (SBUX) fell by 1.5% and 1.6%, respectively, but that was slower than their previous falls. The iShares MSCI Brazil Index (EWZ) fell by 3.7% on January 15, 2016. That fall was more than the previous day’s rise of 2.5%.

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