Cocoa up for big gains as December contract promises 22% return
COCOA COULD BE UP for the biggest annual gains as market bulls have increasingly backed the commodity through this year’s roller coaster ride.
At a settlement of $2,311 a tonne last week, cocoa’s most active December contract on ICE Futures US promised a 22 percent return for anyone who had bought in at the end of 2017 and held since. With investors projecting highs in the $2,400-$2,500 range next, the confection and beverage material could remain the second best performing commodity through the third quarter, if it doesn’t usurp the top spot held by wheat, that is. While believing in cocoa’s resilience was a prerequisite for investors who weathered steep losses earlier this year, some admitted relief, even surprise, with the market’s ability to come back from a 13 percent drop in May and a 14 percent plunge in July.
“We got lucky,” said James Cordier of Optionsellers. com in a monitored report, who described called a $200 rebound for cocoa just after the July selloff that brought it down to $2,153 a tonne. “We think cocoa is pretty close to fairly priced right now, with a little bit more upside left...We see it at between $2,450 and $2,500 in the fourth quarter, partly because of supply scares. It’s not clear how easy it will be to get cocoa out of certain parts of West Africa going forward. We’re going to have to add $50 to $100 a tonne just for that.”
According to Peter Mooses at RJO Futures, “Supply and demand news has been volatile but there is very little chance that production numbers will recoup enough to pressure the market”. Mooses, who trades cocoa and other soft commodities, wrote in a commentary.
“If transportation blockage starts to affect key grow- ing areas’ ability to move their cocoa, prices may reflect this short-term,” he said.
Although cocoa was technically overbought, there were enough fundamental concerns to convince market bulls to add to positions, said Mooses. “Weather premium may also be added to the equation this time of season. Look for $2,400 to be the next target.”
Shawn Hackett, the founder of Hackett Financial Advisors, an agricultural markets consultancy agrees that weather will be the market’s driver in coming months. “Whether an El Nino-driven drought can cause production hiccups will make all the difference to cocoa prices,” he said in a recent note.
Cordier of Optionsellers says he places more faith on cocoa grinds, which were expected to continue improving in the second half, supporting higher prices. Grinding produces important primary products from cocoa, such as the powder used for baking goods and the butter that gives chocolates and ice cream their velvety texture.
Cocoa grinds in Europe produced about six percent better results in the first half of 2018 versus the same period a year ago, while those in Asia were about 10 percent more productive, on the back of stronger economic growth. North American grinds, in comparison, turned out about two percent less products.
But cocoa grinds can also play out differently when economies slow, Cordier said. While there’s little correlation between cocoa demand and anaemic growth in the US, there’s a definite impact in poorer countries, where chocolate is a luxury. He added.
“If there’s a contagion of sorts in emerging markets or if trade negotiations and sanctions don’t ease up in the relatively near future, it will start taking its toll on more than just currencies or the stock market.”
Cocoa grinds in Europe produced about six percent better results in the first half of 2018 versus the same period a year ago