Tag Archives: ivory coast

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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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.