Cocoa: Trouble in Cote d’Ivoire and Ghana
Political problems have plagued West Africa including the Cote d’Ivoire and Ghana for years now. Cocoa producers in these two major producing countries (60% of world production combined) also have to contend with diseases to their crops, namely the swollen shoot virus. This virus defoliates and can potentially kill cocoa trees in many parts of West Africa. According to a BBC News report on October 13, 2006, some cocoa plantations have been abandoned as the virus continues to spread. The increasing costs of fertilizers (derived from petroleum) and the high cost of anti-virus sprays combined with low prices for cocoa on the open market have made it difficult for farmers to maintain their crops.
According to the International Cocoa Organization’s August 23, 2006, estimates for the 2005-2006 put world crop and total use at approximately the same level of 3.47 million tons. Ending stocks are estimated at 1.42 million tons (unchanged from last year) or 41% of annual use. As of March 31st, 2006, Europe's cocoa grind stood at 308,775 tons, up 9% from a year ago while U.S. cocoa grind stood at 104,690 tons, up 2.7% from a year ago.
In Ghana, the government has spent 97 billion cedis ($1= 10,000 cedis approximately) on the mass cocoa spraying exercise this year as well as 315 billion cedis on cocoa fertilizer.
Another issue that has surfaced recently was issued by the Authorities at the Liberia Produce Marketing Cooperation (LPMC) who disclosed that cocoa and coffee beans are being smuggled through the borders to neighboring Guinea on a daily basis. LPMC said that the Guineans were purchasing the coffee and cocoa directly from the Liberian farmers without any regulations, therefore depriving the government of revenue.
In Indonesia (the third largest producer of cocoa in the world), cocoa exporters are dealing with trying to find good quality cocoa to meet world market.
On a positive note, researchers at Cornell University have shown that hot cocoa contains more antioxidants per cup than a similar serving of red wine. Antioxidants have been shown to fight cancer, heart disease and aging. Using special analytical techniques to evaluate the total antioxidant content researchers showed that, on a per serving basis, the antioxidant concentration in cocoa was highest compared to red wine, green tea and black tea. It was nearly 2 times stronger than red wine, 2-3 times stronger than green tea and 4-5 times stronger than black tea.
On the technical side, volatility appears to be increasing, as evidenced by the wider range from highs to lows in the past few sessions. March Cocoa also appears slightly oversold and could be in for a run-up to the 1560 level. If broken, look for a continuation to 1610. There is a strong possibility for cocoa to return back to the 1700 level if crop damage comes in worse than expected and if demand continues to climb over the next few months.
Weekly Cocoa Chart
STRATEGY: Buy March Cocoa on a retracement to 1510. Place stops at 1469. You may also consider the 1600 call options in the May contract for a premium of $700 to $750.
STOP LOSS ORDERS MAY NOT LIMIT YOUR LOSSES TO THE AMOUNT INTENDED. CERTAIN MARKET CONDITIONS MAY GET DIFFICULT OR IMPOSSIBLE TO EXECUTE SUCH ORDERS. YOU SHOULD BE AWARE THAT THERE IS A RISK OF LOSS IN FUTURES TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. FUTURES TRADING IS NOT SUITABLE FOR ALL INVESTORS. THE RISK ASSOCIATED WITH FUTURES TRADING IS SUBSTANTIAL. ONLY RISK CAPITAL SHOULD BE USED