10-14-2019: December Cocoa: Multinational Bloc Price Support Programs Not Just In Rumor Stage

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calendar Spread

Level Table
Other Factors
Recommendation

1

5    2

3    6    7

4  01


Introduction

As world concern over sustainabilitiy, global warming, and deforestation finally begins to take effect in cocoa-producing countries, most remedy programs are still in the "rumor" stage and would affect future seasons. The current season seems to show increasing supply and multinational corporation buyers and grinders of cocoa (chocolate makers) have cooperated only minimally in supportiong sustainability programs to diversify farmer crops away from cocoa because it places their businesses at risk. Cocoa is going to get more expensive in coming seasons, but the delay may not support current season cocoa prices, so that rumors of or actual government subsidy and price control programs seem more of a future factor. Cash versus futures price of cocoa suggests the truth of this assessment.

However, our technical indicators are overwhelmingly favoring a further upmove. We must assume there are traders out there who know more than we do. They appear to have confidence that governments of cocoa-producing nations will reel in overproduction and regulate the price of cocoa to pay additional subsidies to farmers in the near future. The market seems to be saying it is going to happen sooner rather than later.


Intermarket Analysis

We fed Cocoa, Coffee, and Sugar into a neural network to get the following result:




Parabolic Chart

December Cocoa:

Parabolic Chart


Nirvana Chart

December Cocoa:

Initial Chart


News Analysis

Cocoa has benetiffted from stronger European stock markets and a rally in the Eurocurrency that helped sooth near-term European demand concerns. Optimism regarding U.S./China trade relations also found its way into the cocoa trade. UK/Irish Brexit talks triggered a ralliy in the British Pound which encouraged arbitrage buying of New York Cocoa versus the London contract denominated in Pounds.

Ivory Coast and Ghana cocoa regulators and reviewing the cocoa sustainabilitiy and certification programs of chocolate manufacturers. They may be focusing more on those sustainability programs at the expense of implementing the living-income differential plan which levies a premium of $400 per tonne on cocoa. Initiatives include CocoaAction, a $500 million "sustainability scheme" launched in 2014 that was done in the interest of large multinationals. To sustain their livelihoods, cocoa farmers of the Ivory Coast and Ghana need to deversify away from cocoa production, but they are under pressure from multinational chocolate companies who need farmers to keep producing cocoa. There are reports that Nigeria and Cameroon are in discussions to form a regional bloc and agree to a common premium for their cocoa beans.

Demand for West African output remains uncertain but is buoyed by decreasing global risk concerns related to demand because of potential Brexit progress.

The chocolate industry is worth more than $80 billion a year. But some cocoa farmers in parts of West Africa are poorer now than they were in the 1970's and '80's. In other areas, artificial support for cocoa farming is creating a debt problem. Garmers are also still under pressure to supply markets in wealthy countries instead of securing their own future.

Cocoa farming requires tropical forestland. This is limited. It is not possible to keep expanding to new land, so when land is exhausted, farmers would benefit from diversifying to products like rubber and palm oil. But such diversification is more recently prevented by stakeholders and multinational corporations who want cocoa cultivation to continue. Diversificationi is a risk to their business. So they keep spending on cocoa farming inputs.

In West Africa, cocoa has been historically cultivated using slash and burn farming. Forest was cut down before planting and burned, and when the plot became infertile, the farmer moved to fresh forestland. New land offered favorable microclimate and fewer pests and diseases. Almost half of two major national parks in the Ivory Coast has been lost to cocoa planting just since the year 2000. The parks are homes to endangered species. The area covered by forest in the Ivory Coast decreased from 16 million hectares in 1960 to onlyi about 2 million in 2005. Slash and burn is no longer and option, and cocoa farmers must stay onthe same land and rework it. This is producing rising costs and threats. Replanting efforts on same land requires 260 dayis per hectare of labor compared for 74 days using slash and burn. Sedentary cultivation is leading to child trafficking and child labor in cocoa cultivation. In the cocoa industry, child labor in increasing whereas in other crops it is decreasing. Child laborers increased by 400,000 in the Ivory Coast alone between 2008 and 2013.

Production costs therefore have increased for fertilizer and pesticides. In Ghana, the goivernment through its cocoa marketing board has managed the transition from slash and burn toi sedentary farming. It has created farmer subsidies, and sometimes those programs are supported byi multinational corporations, so farmers have not become poorer in Ghana. But the government incurred a huge $367 million debt for subsidizing the price of cocoa. The shift to debt farming has artificially produced the "success."

Thus the switch to "sustainability" programs is not the answer for cocoa farmers as opposed to diversifying to other crops. The bottom line is that there will be an increasing limit to cocoa production.

After the Ivory Coast and Ghana moved to lift prices, Cameroon and Nigeria had informal talks to agree to a cocoa premium as well. Nigeria is the world's fourth largest cocoa producer. Ivorly Coast and Ghana accounting for two thirds of the world's cocoa output imosed a fixed "living income differential" of $400 per tonne on all cocoa contracts sold by either country for the 2020/21 season. But the two countries exert limited influence over international prices. All four countries have striven to address a preceived imbalance between farmers' incomes and money made by big commodities traders.

The cocoa markets have seen big swings and global overproduction sent prices crashing in 2016-17. Oversupply causes a slow recovery. Peru said it would impose a minimum price of $3,200 per tonne to its regional growers. It makes up 17% of global production.

The fear is that if a bloc is not formed by all nations, one nation may profit from increased share of the business from cheaper prices. A lot of the proposed "bloc" agreements is just rumor.

Ivory Coast's main crop is expected to be between 1.65 and 1.70 million tonnes, which is largely in line with last season. The International Cocoa Organziation (ICCO) forecasts world cocoa production will increase by 4.3%, and world grindings increase by 4.1%, leaving 1.0% increase in end-of-season stocks. Total world production would be at 4,849 thousand tonnes with ending stocks at 1,740 thousand tonnes. The ICCO is attempting to encourage and address climate change issues and the deforestation issues with coicoa farming in a responsible way. In the last analysis ways must be found to encourage chocolate producers to provide more support for programs to increase cocoa farmer living standards by paying up for cocoa.

Latest cocoa cash prices are 2516 versus the December futures price range of roughly 2460. Nigeria recently cut its main crop total production estimate. Ivory Coast and Ghana will voluntarily limit 2019/2020 cocoa production. Ghana is suffering from an outbreak of swollen shoot cocoa disease that has killed cocoa trees. That affected about 16% of the cocoa crop in Ghana. Big picture cocoa market factors include the ICCO's anticipated 4.3% climb in world cocoa production to a record high. Current cocoa supplies monitored by the ICE exchange have tightened and trended lower over the past three months, but cocoa is now increasingly reaching ports in the Ivory Coast.

Our assessment of this news is that government regulatory programs do not appear to be affecting this season as much as they will in future seasons and that if anything, cocoa production and availability is increasing until governments finally totally agree upon and implement some form of multinational bloc arrangement to deal with multinational corporation buyers.

An article in the UK's "The Mirror" news service claims chocolate could run out in 2020 due to an impending world shortage as cocoa farmers switch to rubber plantations. If that happens, it is believed "chocolate" products will contain increasing amounts of palm oil and sludgy additives, and bars will shrink and be made into funky shapes to attract buyers to a less quality product.


Point & Figure Chart

 32.5|                                                                  R 10/11
     | ICE - Dec-19 Cocoa, 10 metric ton $100/ton  Cm.=0.03  Lim.= 1.5
     |
     |
     |
 31.0|_________________________________________________________________________
     |                                 X
     |                                 XOX
     |                                 XOXO
     |                                 XOXOX
 29.5|_________________________________XOXOXO__________________________________
     |                                 XOXOXO
     |                                 XO OXOX
     |                                 X  O OXO
     |                                 X    OXO
 28.0|_________________________________X____O_O________________________________
     |                                 X      O
     |                             X X X      O
     |                             XOXOX      OX
     |                             XOXOX      OXOX
 26.5|___________________________X_XOXOX______OXOXO____________________________
     |                           XOXO OX      OXOXO
     |                           XOX  OX      OXOXO                  X
     |                           XO   O       OXOXO                X XO
     |                           X            OXO O                XOXOX
 25.0|___________________________X____________OX__O________________XOXOXOX_X___
     |                           X            OX  O                XO OXOXOX
     | X                         X            OX  OX X           X X  O OXOX
     | XOX                       X            OX  OXOXO  X   X   XOX    OXO
     | XOXOX                     X            O   OXOXO  XO  XOX XOX    OX
 23.5|_XOXOXOX_________________X_X________________OXOXO__XO__XOXOXOX____OX_____
     |OXO OXOXO  X             XOX                OXOXO  XOX XOXOXO     OX
     |O   OXOXO  XO            XOX                OXOXO  XOXOXOXOX      OX
     |O   O OXO  XO            XOX                OXOXO  XOXOXO O       OX
     |      O O  XOX           XOX                OXOXOX XOXOX          OX
 22.0|________O__XOXOX_X_______XOX________________O_OXOXOXO_OX__________OX_____
     |        OX XOXOXOXO  X   XOX                  OXOXOX  OX          OX
     |        OXOXOXOXOXO  XO  XOX                  OXO O   O           O
     |        OXOXOXOXO O  XOX XOX                  OX
     |        OXOXOXOX  OX XOXOXOX                  O
 20.5|________OXOXOXO___OXOXOXOXOX_____________________________________________
     |        OXO OX    OXOXOXO OX
     |        O   OX    OXOXOX  OX
     |            OX    OXOXO   OX
     |            O     O O     O
 19.0|_________________________________________________________________________
     |
     |
     |
     |
 17.5|----|----|----|----|----|----|----|----|----|----|----|----|----|----|---
      11111                     11                   11111                11
      2222211112233555666677889912333344455555566678801222123344556667777800
      0111200121213023011301120112122201200111102202300011110222010010122201
      9369259205830840529078056458928831613157786961098713554639963678526371
Our computer tells us a non-conventional reactive approach works best for cocoa on p&f charts. Therefore the above chart is taken as giving a buy signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal down period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "Zondr". It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "Zondr" for Cocoa (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $1,000. Initial margin on a single contract is $2,090. Use of options is advised.


Historic Range

Scale traders are not a factor in this price range.

Historical Chart


Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories may vary from ours):

Commitment 3


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to down is imminent near a volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Cocoa May 2350 Put & Sell (1) Cocoa March 2450 Put @ 41 to the sell side or better.


o 1 o 2 o 5


Calendar Spread

What the Dec. - May calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go up in the long run. The best time to enter or leave the above spread is when it is at +0.07 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -0.40 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be headed toward the sell the far, buy the near point.





Level Table:

Level Table

The path of least resistance is up.

To view the chart below correctly use Microsoft Internet Explorer.

 26.5|                                                                  T 10/11
 ICE - Dec-19 Cocoa, 10 metric ton $100/ton  Cm.=0.03  Lim.= 1.5
     |
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 26.0|TT_______________________________________________________________________
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 24.5|BBBFFQQQQQRRSSTTUUUYYYYYZZZZZZZ[[________________________________________
     |BBBFFQQQQQQQRRTTUUYYYYYZZZZZ[[
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 24.0|BBBFFFFFFFFFFGGMNNNNNNNNNNOQQQQRRUUVYYZZZ[_______________________________
     |BBBFFFFFFFFGGGMMNNNNNNNNOOOQQQQRRUUVYYZZZ
     |BBFFFFFFFFGGGGMMNNNNNNNOOOOOOPQQQRRVVYYY
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     |BBBBFFFFFGGGGGJMMNNNOOOOOOPPPQQRRVVVYY
 23.5|ABBBBBEFFGGGGGGJMMNNOOOOOOOPPPPPQQRRVVVYY________________________________
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     |ABBBBBBCEEFFGGGGJKKMMNOOOOOOPPPPPPQRVVYY
     |ABBBBCEEEEGGGGGJJKKKMMNOOOOOPPPPPPPPRVVYY
     |ABBBBBCEEEEGGGGHJJKKKKKMMOOOOPPPPPPPPRVVY
 23.0|AAABBBBCCEEEEEGGGHJKKKKKMMOOPPPPPPVXXXY__________________________________
     |AAAAABBBCCCCEEEEEEGGHHJKKKKKKMOOPPPPPPVXXXY
     |AAAAAAAABBBCCCCCEEEEEEGGHHHHJJJKKKKKKMOOOOPPPVVXXXX
     |AAAAAAABBBCCCCEEEEEEEGGHHHHHJJJKKKKLMMMOOOPVVXXXXXX
     |AAAAAAABBCCCCCEEEEEEGGHHHHHJJJJKKKLMMMOOPVWXXXX
 22.5|AAAAAAABCCCCCDEEEEEGGHHHHHHJJJJJKKKLLLMMMMOOPVVWWWXXXX___________________
     |AAAAAAACCCDDEEEEEGGHHHHHHJJJJJJKKKLLLMMMMOPVVVWWWXXXX
     |AAAAAAACCCCDDEEEHHHHHJJJJJJKKKLLLLLLLLMMMPVVVWWWXXXXXX
     |AAAAAACCCDDDDEEHHHHJJJJKKKLLLLLLLMMMVVVWWWWXXXXX
     |AAAACCCDDDDDEEEHHHHJJJKKKLLLLLLLMVVWWXXXX
 22.0|AACCDDDDDEEEHHHHJJKKKLLLLLMVWXXX_________________________________________
     |AACDDDDDEEEHHHHKKKLLLMVWXXX
     |CDDDDDEEEHHHHKKKKLMMVWWXXX
     |CDDDDEEEKKKLMMVWWXX
     |CDDDEELLMMWWWW
 21.5|CCDDDDDDEELMWWW__________________________________________________________
     |CCDDDDDDEELMWW
     |CCDDDDDEELWW
     |DEW
     |DEW
 21.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.407
       1 1 1 1 1 1                                       1           1
       0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 7 8 8 9 9 0           0
       1 2 1 2 1 2 1 2 0 2 0 2 0 2 0 2 0 1 0 1 3 1 2 1 2 1           1
       6 9 2 7 1 6 0 4 7 2 8 2 5 2 6 0 4 8 2 7 1 4 8 2 6 0           1



Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 10/11 ).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                  CCZ9    December Cocoa

                      High Price:  2730
                   Current Price:  2506
                       Low Price:  2397

                            Risk:  0.085
                     Opportunity:  0.175

                    (O/R) Ratio =  2.055


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart + 1
Nirvana Chart - 1
News - 1
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 0
Third System - 1
Historic Range 0
Commitment of Traders + 1
Range/Volatility + 1
Level Table + 1
Other Factors + 1
Total + 3
Place 7 December Cocoa on a Buy Watch with stoploss @ -1.33 below the get-in point when recent price is represented as "25.06".
____________________________________________________________________________________________________________________________________________H.Y.