Cocoa Heating Up Again

Fundamentals

Cocoa futures advanced yesterday on a report from the Ivory Coast government that suggests output may fall by as much as 15% by the world’s largest producer due to lack of private investment and pesticides. The government’s program to provide farmers pesticides to prevent black pod disease has been hampered, suggesting that not only will the Ivorian crop fall short of demand, but quality issues may plague the market. The International Cocoa Organization forecast a global deficit of 73,000 tons for the current crop year, and the leaked report from the Ivory Coast government would lead one to believe that there will be a deficit next year - the fourth consecutive yearly deficit. This news is certainly bullish for the Cocoa market. With Brazil struggling to meet the world’s Sugar demand, little resources are left for the South American nation to fill the vacuum created by the Ivorian shortfall. This means that producers will have to take it on the chin and pay up for Cocoa beans because of a lack of substitute commodities.

Trading Ideas

Both the technical and fundamental outlooks for the December Cocoa contract point toward the possibility of further price advances. Some traders may wish to consider going long the December Cocoa (CCZ9) contract at 3125 or lower. Upon entering the trade, longs may perhaps want to work an OCO order, selling at 2975 on a stop and 3325. The trade risks roughly $1,500 for a maximum profit of $2,000.

Technicals

The December Cocoa chart shows prices firmly establishing themselves above the $3,000 a ton mark. There has been a period of consolidation, which has caused the RSI to come back down to neutral levels. The chart pattern does, however, show the market may be vulnerable in the event that price do drop below the 3,000 level, but the technicals do still favor the upside. Momentum is showing bullish divergence from both price and RSI. This, coupled with spinning top candlestick, paint a bullish short-term technical outlook.

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