Cuckoo for cocoa futures
is building bullish technical energy highlighted by
an ascending wedge formation that reflects a coiled
spring preparing to release an explosive move. The MACD
recently has triggered a buy signal, increasing the
odds of a breakout over the next several months (see
breakout, should it occur, will be explosive, but the
technicals are not the only reason to be bullish cocoa.
The long-term structural supply/demand imbalances that
have created a series of recent deficits are not going
away anytime soon. In 2010, Mother Nature was unusually
kind but, because of the aging tree population in the
Ivory Coast and the depleted soil content in Ghana,
such favorable weather will not produce record crops
and likely will produce a global deficit in 2011.
many high profile cocoa analysts have downgraded global
cocoa production as good weather was overplayed and
the deleterious effects of decades of lack of investment
in the cocoa industry were underemphasized in their
analyses, leading to overly optimistic global production
International Cocoa Organization (ICCO) recently has
increased deficit expectations for the 2009-2010 marketing
season. The likely probability for 2011 is that weather
becomes normal to adverse and sets global cocoa production
back into a major tailspin, leading to shortages of
high quality cocoa. With demand for this kind of cocoa
strong and demand growth expected apace, record highs
are a matter of when, not if.
have seen the cocoa market move well above $3,000 per
ton over the last several years without generating the
kinds of investments that are desperately needed to
rejuvenate long-term global production. Additionally,
there has been very little demand degradation during
these spikes. It will take much higher prices to accomplish
a more balanced cocoa trade, especially against the
increasingly economically competitive alternative markets
for growers, such as rubber, palm oil and coffee.
it any wonder that processors and merchants have loaded
up on cocoa futures to hedge against a likely price
spike in future years? The people that know more about
the cocoa trade than anyone else see much higher prices
on the horizon.
operators tend to hold near-record long positions at
major bottoms as they rush in to protect upside price
risk. If you look at the times that commercial net longs
have risen to the levels we have today, they have been
followed by bull moves. It has been profitable for investors
to follow the commercial net positions and buy when
they have become historically long.
Intercontinental Exchange US (ICE) certified warehouse
cocoa stocks being drawn down over the last six months
to some of the lowest levels seen since 2009, and with
near record cash premium differentials against futures,
the fundamentals remain very bullish. Add that to the
bullish technical and commercial signals, and cocoa
can make an historic move.
piece to consider when analyzing potentially major turning
points is relative value. For cocoa, two of the most
important relative value measures — the cocoa/CCI (Continuous
Commodity Index) price ratio and the cocoa/sugar price
ratio — are flashing major long-term buy signals. Both
measures are at some of the lowest levels seen over
the last 40 years, and low levels typically have preceded
major bull market moves.
has a history of being a rogue commodity with, at times,
very little correlation to the rest of the commodity
complex. This is important as we may be facing an extended
commodity correction, but the cocoa market could still
see a major bull run.
initial margin requirement for cocoa futures is $1,610
per contract, making it one of the more affordable commodities
to trade. Front-month cocoa closed at $2,758 on Dec.
1. A trader could get long in that area with a protective
stop placed at the Sept. 13 low around $2,600, proving
a better than 3:1 risk/reward ratio. A tighter stop
can be utilized following the bottom trendline which,
as long as it holds, supports a long position. Look
for opportunities to buy March 2011 cocoa on any correction
that takes prices under $2,800 for an eventual move
up to the $3,400/ton area in 2011.
the technicals, fundamentals, commercials and relative
value measures all aligning with historical bullish
signals, investors should take notice. And given cocoa’s
history of independence, it could be the one commodity
to buy in the first part of 2011.