Cocoa prices have fallen about 30 percent in the past twelve months, but Keith Flury, Senior Commodity Analyst at Rabobank says they will continue to edge lower in the short-term.
Flury pointed to supply as one of the factors weighing on the cocoa market.
"In the 2010-11 season, we realized the 400,000 ton surplus—the largest surplus ever. And in the 2011-12 season, it looks like we also might see a small surplus," he said.
"All of that supply means that the stocks and the inventories are growing. And that is weighing on the prices."
Flury also cited political instability as a factor that could hurt cocoa. "There are concerns of the Ivory Coast government pre-selling the 2013 crop, which might mean that we’re double hedging at the moment."
Despite a short-term bearish outlook, Flury foresees future growth in the cocoa market and a potential correction of prices.
"In 2008, cocoa demand was extremely reduced due to the financial crisis. Chocolate producers reduced sizes and people started to consume less," Flury said. "But since 2008 we’ve seen steady, gradual increases in demand and we expect that to continue."
Flury explained that demand for cocoa powder has significantly increased in Asia and emerging markets. He expects that demand to increase in the next couple of years.
The last piece of the puzzle is prices. Over the past four seasons, cocoa prices have averaged about $2,800 a ton.
Those prices are currently sitting at just over $2,000 a ton in New York. Flury is confident that these numbers are a positive sign for growth in the cocoa market.
"This means that the farmgate price in West Africa is also very low, meaning that we might see a supply disruption in the next season and that is very conducive for prices moving forward," Flury said.