Tag Archives: cocoa

Using Divergence to Trade Cocoa

The group of markets known as the, “softs” or, “exotics” include markets like coffee, sugar, orange juice and cocoa. These are all traded on the Intercontinental Exchange and each market marches to its own beat. These markets are known for their volatile moves but rarely get the trading attention they deserve. For some, like orange juice, it’s due to low trading volumes that make it tough to execute any more than a couple of contracts. However, others like coffee, sugar and cocoa have more than enough volume to handle 10 contracts or more in a single execution. Finally, because these markets have little correlation to the majors, their analysis is frequently overlooked. Today, I’ll review one of my favorite trading techniques in these markets and detail the current situation setting up in the cocoa futures market.

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Weekly Commodity Strategy Review

This morning’s unrevised Q4 GDP number at 2.2% on declining corporate profits provides just the right ambiance for a what has been a gloomy week. While we had a completely separate trade looking at multi-year lows in , “Time to Sweeten on Sugar,” most of our focus was on the financial markets.

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Cocoa Shortage Fears Overblown

Cocoa shortage news seems to be going viral when the fact of the matter is that cocoa prices will structurally decline in the coming years due the modernization of an industry that’s been marginalized for more than 20 years. The Ivory Coast which, is the number grower in the world is undergoing full on paradigm shift due to President Allasane Outtara.

As we said last year, “President Ouattara, who was educated here in the U.S. at Drexel University, is quickly modernizing the Ivory Coast’s cocoa markets. There’s been rapid development in soil reclamation, fertilization and education. Most cocoa is grown by individual farmers on small plots of land and is harvested by hand as it has been for hundreds of years. The application of modern agronomy techniques will cause the Ivory Coast’s cocoa production to increase rapidly over the coming years. The combination of infrastructure improvement and political stability supporting free trade and as well as modern farming practices will increase yield and depress prices once the changes are fully implemented.”

Read more – Paradigm shift in the Cocoa Futures Market.

no cocoa shortage
There’s clearly no shortage in the cocoa market.

See our past cocoa futures articles.

Read the rest of today’s piece, Cocoa Fear are Overblown at Equities.com

Weekly Commodity Strategy Review 10/17/2014

What a crazy week this has been! Nearly a 100 point range in the S&P 500 and more than a 4.5% range in bonds!

Quantitatively speaking it’s been a pretty quiet week in our trading. The cocoa trade we discussed in TraderPlanet has consolidated throughout the week. The consolidation does allow us to adjust our stops accordingly as well as provide an additional point to add on to the trade once it starts moving in our anticipated direction.

You can recap the details in, “Commitment of Traders Report Supports Cocoa.”

Continue reading Weekly Commodity Strategy Review 10/17/2014

Commitment of Traders Report Supports Cocoa Market

This morning’s piece for TraderPlanet combines all of the classic elements necessary to create a Commitment of Traders buy signal in the cocoa futures market. We discuss the macro factors that have kept the commercial traders on the short side of the market during its extended sideways range near the highs as well as the cause of the recent sharp sell off. Finally, we examine the technical nature of the market and exactly what this trade is setting up and the risk entailed.

Fully mechanical Commitment of Traders markets and equity curves.

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Competing Forces in the Cocoa Market

The cocoa futures market is undergoing a dramatic transformation that is rapidly increasing production stability and supply yet, the market is at its highest prices since July of 2011. The market is currently caught between the pressures of efficiency driving the market lower over the long-term and short-term demand doing its best to buck this trend. These are exactly the types of scenarios that create trading opportunities for the commercial traders we follow. Their outlooks and bank accounts are skewed toward long-term corporate growth which allows them to focus on value principles that will remain intact for prolonged periods rather than tuning their operations strictly to the whims and trends of personal sense gratification.

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Cocoa Prices Set to Surge

It’s been more than a year since we’ve discussed the cocoa futures market in any depth. Last February we discussing the seismic changes in the Ivory Coast’s political landscape and the paradigm shift in cocoa farming practices this would facilitate. African politics being what they are, it should come as no surprise that two years later there’s been less hope and change than was originally sold to the country’s people. The result may cost First World cocoa consumers a pretty penny in 2014.

Continue reading Cocoa Prices Set to Surge

Paradigm Shift in the Cocoa Futures Market

Cocoa futures are one of the most volatile markets. This has been primarily attributed to three historical variables politics, antiquated farming methods and weather. Two of these three variables are being addressed directly while the third remains a wild card that may pull the trigger on a substantial rally in an agricultural market undergoing a complete paradigm shift.

The Ivory Coast is the world’s largest producer of cocoa. Prior to 2011 it was presided over by Laurent Gbagbo who ran the country in typical West African fashion for more than 10 years. The open elections of 2011 led to a brief civil war when Alassane Ouattara was elected President and Laurent Gbagbo refused to cede the Presidential office and used his cronies in the military to hold off the inevitable. The regime change was inevitable because Ouattara, who is a former International Monetary Fund (IMF) economist, has the full support of NATO as well as the military backing to support a more democratic and transparent government. The installation of Ouattara should eliminate much of the political volatility that has been a hallmark of the cocoa futures market for many years.

President Ouattara, who was educated here in the U.S. at Drexel University, is quickly modernizing the Ivory Coast’s cocoa markets. There’s been rapid development in soil reclamation, fertilization and education. Most cocoa is grown by individual farmers on small plots of land and is harvested by hand as it has been for hundreds of years. The application of modern agronomy techniques will cause the Ivory Coast’s cocoa production to increase rapidly over the coming years. The combination of infrastructure improvement and political stability supporting free trade and as well as modern farming practices will increase yield and depress prices once the changes are fully implemented.

The effects of Ouattara’s Presidency can already be seen in the decline of volatility in cocoa prices. Major chocolate producers no longer have to worry about civil war, the government closing ports or henchman attacking farmers on their way to collection stations to force the price higher. The price range in 2012 was $2,003 – $2,707, a measly 35%. The range for 2011 was more than 90%. In fact, the five-year average range is more than 50%. These wild rides are less likely to occur, as weather becomes the only variable left to move the markets.

This sets the stage for the current battle in the market. Cocoa futures have been on a steady slide since fall. The market appeared to be forming a technical bottom during this period. However, it was clear by the commercial selling that the bullish saucer base pattern, between $2,310 and $2,510, that had been supported by the small speculators had little chance of pushing the market higher. The slide through the 2013 price level is primarily attributable to the small speculators being forced out of their long positions at a loss.

The market has recently traded as low as $2,100. Commercial traders have been covering their short hedges and locking in futures supply line purchases since the market first fell through the $2,310 level. Commercial traders have been net buyers in nine out of the last ten weeks. Recently, weather issues have reduced estimates for the current mid crop harvest due to a lack of rain throughout the Ivory Coast as well as growing regions in Ghana, the second largest producer. These two countries account for nearly 60% of the world’s production.

The key price level is $2,000 per ton. The market traded below here once in 2011 and rallied $500 per ton in just a few weeks. Overall, the market hasn’t spent any time below $2,000 per ton since the commodity boom of 2007. We’ll side with the commercial traders and look for buying opportunities as the last of the weak speculators are forced out of the market. Perhaps, the best way not to miss out on the rally is to place a buy stop order above the market’s recent resistance level around $2,150. If this order gets filled in the May cocoa futures contract, place a protective sell stop at what becomes the low price of this move. We’ll look for a minimum price target of $2,310, the bottom of the old saucer formation.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Crude, Cocoa or Democracy?

Writing about commodities usually means discussing supply and demand issues. The weather may be too hot in one area while another area may be facing labor issues and so on. Rarely is there an opportunity to focus the lens of my research directly on U.S. foreign politics. The events over the last few months in the Ivory Coast and Libya have provided us with an apples to apples comparison of exactly how the current administration intends to position the United States in respecting the national sovereignty of foreign leaders versus the protection of global financial interests in those same countries.

In January, we discussed the politics of the cocoa market. The Ivory Coast held a public election in December and the United Nations recognizes the winner of that election, Alassane Outtara as the rightful leader of that country. However, the former leader, Laurent Gbagbo has refused to step down. He has control of the military and the governmental purse strings. The citizens of the Ivory Coast have taken up arms to force him to step down and recognize the newly elected President as the peoples’ choice for the future. Gbagbo’s response has been to turn the country’s military on its own people rather than step down.

The Libyan situation is in the news every day. The Libyan people are attempting to overthrow their leader by starting a civil war. This is the same leader who assumed the leadership role forty years ago through a military coup. Gaddafi is using his military, made up of Libyan citizens, to forcefully quell the rebellion. Both Gaddafi and Gbagbo stand accused of committing serious crimes against their people to enforce their dictatorial wills.

The primary differences between these two situations are the facts that one leader was the rightful winner of a public election while the other’s leadership is being challenged in the same manner in which he claimed it to begin with. The Ivory Coast is responsible for more than 60% of our cocoa imports while Libya is responsible for 2% of our oil. Libya, who ships much of their oil to old European countries like Spain, Italy, France, Germany and the United Kingdom is being covered by all of the major news sources 24 hours a day. The Ivory Coast, however, rarely makes the crawler on CNN.

The United States is being urged to take action in Libya by much of the world with Old Europe crying the loudest. There are discussions of enforcing a no fly zone throughout Libyan airspace to prevent Gaddafi from bombing his own citizens and economic sanctions have already been put in place. Meanwhile, Gbagbo, whose official presidential term expired five years ago, is using his military power to forcibly put down the protests in which hundreds have died and has cut off all U.N. humanitarian aid to his impoverished people.

The United States is being forced to set a moral standard by which it will be judged throughout the world. The current administration also has an opportunity to set an example with our own people by defining its focus on the balance of foreign versus domestic political asset allocation. The U.S. may be able to offset some political ills by proportionately supporting the United Nations in its attempts to install the rightful and recognized leader of the Ivory Coast while avoiding the baited hook of spearheading another oil filled military conflict with no end game in sight.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

The Politics of Cocoa

The Ivory Coast is caught in the middle of a major struggle. They are the world’s largest cocoa producer and are believed to have some of the largest untapped oil fields in the world. The country should be laying the groundwork and creating the infrastructure to capitalize on their natural resources and developing as a nation. Instead, their nation is on the unsafe to travel list by the CIA and they are on the brink of declaring marshal law.

Laurent Gbagbo has ruled the former French colony for the last ten years. He has been accused of siphoning money from the country into his personal offshore coffers and silencing any political rivals quickly and ruthlessly. During his reign, he has sold approximately two billion worth of dollar denominated bonds on the world market. He has also actively solicited Russian investment in oil and mineral deposits. Russia’s number one private oil company, LUKoil has an estimated stake of nearly $800 million in oil drilling and development rights and plans with the Ivory Coast.

The first open election in years has ousted Gbagbo and installed Alassane Ouattara as the President elect. The election results are supported by the United Nations and he is a former deputy managing director at the International Monetary Fund. However, Gbagbo has refused to acknowledge the results and still controls the military and the purse strings. Therefore, he has simply refused to make payments on the bonds they’ve issued to the global market unless he is recognized as the county’s leader and is using the military to enforce his rule.

Gbagbo has placed himself in the middle of an international trade dispute between two superpowers. His deal with LUKoil will most likely be renegotiated if Ouattara assumes leadership. LUKoil is using the Ivory Coast investment to lobby against domestic Russian production taxes. LUKoil has to show some production capability in these lands to maintain their leverage against Medvedev and the state run Rosneft. Therefore, it is in their best interest to covertly supply Gbagbo with any means necessary to fuel his standoff. This contingent is also supported by China. They are citing the recent election issues as the climax of 20 years of failed importation of western democracy, while also shoring up their own future natural resource acquisitions.

The United Nations recognizes Ouattara as the rightful leader. Western countries, members of the United Nations and hedge funds hold the vast majority of the outstanding debt. Furthermore, the Ivory Coast supplies one third of the world’s cocoa. In 2010, that cocoa was worth approximately $3.9 billion at exchange prices. London trader Anthony Ward who made the largest exchange purchase in history last July, now owns nearly $100 million of that warehoused cocoa. Ivory Coast cocoa is also traded actively in New York and its supply must be guaranteed in order to trade futures on either exchange.

The Ivory Coast is preparing for military action and the U.N. just sent 2,000 troops. Some are reporting that Gbagbo is simply stalling for time to fortify his defenses. Others are questioning whom he is preparing to defend himself against. Will the Ivorian people rise up in a unified democratic voice or, will there be direct foreign involvement and if so, on whose side? Will western forces step in to defend their financial interests and install democracy in the name of the people or, will Gbagbo hit for the cycle by guaranteeing the exchanges, the bondholders and LUKoil in return for not starting another global conflict?

My father never liked trading the cocoa market. He told me once when I was a kid that he didn’t like the idea of something happening halfway around the world and not knowing about it until it was too late. Trading used to be about gaining access to information. Now, it’s about interpretation.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.