02-27-2018: May Cocoa: Coming Back to Normal Supply/Demand Balance

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors

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West African nations cannot afford to provide price supports to cocoa farmers even though these farmers are an iimportant constituency supporting their governments. The loans from the International Monetary Fund demand stiff repayment terms that force concentration upon other parts of respective economies. This could hurt cocoa prices obviously by forcing producers to sell for less, or it could help cocoa prices by discouraging further investment in cocoa crops, less fertilizer, poorer yields. Weather is also a big factor in the current cocoa crop production where supply could fall short of demand, but the next "mid-crop" harvest is anticipated to be going to eclipse current crop concerns and more or less balance out supply and demand. Demand has been encourage by recent historically low prices, although they are now shifting back to normal.

The general assessment seems to be for a slow, steady climb in prices, but no major breakouts or spectacular moves.

Intermarket Analysis

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

Parabolic Chart

May Cocoa:

Parabolic Chart

Nirvana Chart

May Cocoa:

Initial Chart

News Analysis

A bullish shift in the supply outlook leaves near-term pullbacks as buying opportunities. Near-term weather has been a focal point in West Africa with showers forecast toi become more widespread over the coming week with the heaviest amounts in central Ghana. While this will delay the tail end of their main crop harvesting, some analysts feel this will be moire than offset by the benefit for upcomiong West African mid-crop production following their dry season. A top Ivory Coast grower said, "So far, I don't see any problemsd for the mid-crop and don't reallyi trust the recent strength in the market." A Reuters poll of Ivory Coast cocoa industry players cut their forecast for that nation's main crop outpout from 1.45 million to 1.32 million tonnes, which compares to last season's total of 1.50 million. There is anticipated a sizeable increase in cocoa's net spec long position.

A New Patriotic Party in Ghana-led government in Ghana has little choice but to end subsidizing the prices it pays to 800,000 farmers, support that will likely cost $450 million this season. The Ghana Cocoa Board, the industry regulator in the woirld'.s second-biggest cocoa producer, is runningf out of cash with few options for funding left other than toi sell short-term debt toi local investors at rates as high as 22%. So, risking the anger of these farmers, President Nana Akufo-Addo will struggle toi sidestep one of its most difficult decisions since coming to power a year ago, namely telling a crucial constituency to accept a paycut. His party was swept into power on campaign promises in 2016 to invest in farms and increase prices. Ghana has little room to support prices even if output from new oil fields are supporting economic revival. While the World Bank forecasts the the economy there will expand by 8.3% in 2018, the fastest rate in Africa, the country remains bound by conditions for displined spending that are attached to an almost $1 billion bailout from the International Monetary Fund agreed to in April, 2015.

The Ghana Cocoa Board is losing the equivalent of about $600 for every metric ton of the 850,000 tons that it plans to purchase this seaason until September. When the next harvest season starts, farmers will be paid the quivalent of 70% of the freight-on-board price foir cocoa according to Ghana's regulator. The minimum price in Ivory Coast, the ibggest producer, is the equivalent of $1,291/ton. Advisors say that the Ghana government should prioritize spending on indtrastructure and other programs that can support growth. Producers are not convinced the government will go through with these suggestions, as cocoa is too important for Ghana and its most important bloc of voters.

Cocoa exporters and pod counters in Ivory Coast have revised down their foirecast for thsi y ear's maoin harvest because of hot weather and a lack of rain.

Commerzbank raised its forecast for NY futures for cocoa by $50/ton, i.e. $2,150/tonne for July to September quarter. That bank sees a downside risk if prices in the ICCO key quarterly report upcoming were still to predict a significant surplus for the 2017-18 season.

Cocoa prices had a poor year in 2017, dropping 11% in New York. THey were undermined by strong West African production which drove the world back into a surplus. Accoding to the ICCO, the surplus amounted to 371,000 tonnes, more than making up for the 174,000-tonne shortfall the previous season. Weak prices stimulated demand. ABN Amro says chances for another record-breaking season of West African production are small, as last season weather was ideal. A growing number of trees are becoming relatively old and bearing less fruit. Ivory Coast is running into illegal cocoa production in its protected forest areas. This is being stopped to prevent further deforestation. Higher demand and lower supply will push up prices in the coming period, et cocoa stocks are still relatively high, making and upward price "breakout" unlikely. ABN Amro epxects a cocoa prices of $2,300 by the end of the year.

Citi sees a large 2016-17 market surplus swinging closer to balance in 2017-18. After negative grindings growth in some previous seasons, and about 5% incrase demand in 2016-17, it expects grindings may grow 3.6% during the new-crop campaign. Regional data from North America, Asia, and EU industry groups shows a 50% peak-to-trough drop in coicoa prices in past few years has clearly incentivised cocoa processing growth.

Rabobank also agrees large stocks should prevent any spikes in cocoa prices but sees increasing grindings and reduced support from West African goivernments to cocoa farmers resulting in less fertlizer use and reduced output.

Frosty pod rot, a disease that has been spreading throughout Central America is threatening any cocoa production there, as researchers struggle to develop new resistant hybrids.

Barry Callebaut, a Swiss chocolate maker,is unveiling a whole new convection that comes in a pale rosy shade. We have milk and dark chocolate, but is the world ready for a pnk choocolate? This type of chocolate will have a fruity taste. Callebaut sells chocolate and other cocoa products to businesses, not consumers, so the company cannot say for sure when this new product will hit the shelves. It could take six to eighteen months depending upon country and vendor. This effort joins other manufacturers seeking to produce healthier chocolate snacks. New, healthier chocolates are currently more likely to be developed by very small producers rather than the larger Nestle's or Hershey's products.

Point & Figure Chart

 36.0I                                                                  R  2/22
     I ICE - May-18 Cocoa, 10 metric ton $100/ton  Cm.=0.03  Lim.= 1.5
     I                   X
     I                   XO
     I   X         X     XO
     I   XO        XO  X XO
     I   XO        XO  XOXO
     I X XO        XO  XOXO
     I XOXO        XO  XOXO              X       X
     I XOXOXOX     XO  XOXO              XO    X XOXOX
     I X      OX XOX      O      X XOX   XOX X      OXO
     I X      OXOXOX      O    X XOXOX X XOXOX      OXO
     IOX      OXOXOX      O    X XOXOX XOXOXOX      OXOX
     I        OXOXOX      OXOXOXO       OXO           OXO
     I        OXOXOX      OXOXOX        O             O O
     I        O OXOX      O OXO                         OX
     I          OXOX        O                           OXO
     I          O O                                     O O
     I                                                    O
     I                                                    O
     I                                                    O
     I                                                    O
     I                                                    O
     I                                                    O
     I                                                    O
     I                                                    O
     I                                                    O
     I                                                    OX
     I                                                    OXO
     I                                                    OXOXOX   X
     I                                                    OXOXOXO  XO
     I                                                    O O OXO  XO
     I                                                        O O  XO
     I                                                          OX XOXOXOXO  X
     I                                                          OXOXOXOXOXO  XO
     I                                                          OXOXOXOXO O  XO
     I                                                          OXOXOXOX  OX XO
     I                                                          O   OX    OXOXO
     I                                                              OX    OXOXO
     I                                                              O     OXOXO
     I                                                                    O O
          111111         11                              1111
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 sell signal.

Cyclical and Seasonal Factors

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

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Thrust". It is giving a sell signal.

Internal Printout 1

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


Third System Confirmation

Our third system has triggered a buy 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


The point value is $1,000. Initial margin on a single contract is $1,265. Use of options is not 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 vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that an uptrend remains intact from the last volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Cocoa Septembere 2450 Call and Sell (1) Cocoa September 2400 Call @ 18 to the sell side or better.

o 1 o 2 o 5

Calendar Spread

What the May - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. This disagrees with our ultimate conclusion. The best time to enter or leave the above spread is when it is at -0.48 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -0.70 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be midway with no particular directional trend in the spread.

Level Table:

Level Table

The path of least resistance is up.
 23.0|                                                                  T  2/22
 ICE - May-18 Cocoa, 10 metric ton $100/ton  Cm.=0.03  Lim.= 1.5
 17.5|-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= 0.561
                                       1 1 1 1 1 1                    
       2 3 3 4 4 5 5 6 6 6 7 7 8 8 9 9 0 0 1 1 2 2 1 1 2 2           2
       2 0 2 0 2 0 1 0 1 3 1 3 1 2 1 2 1 2 0 2 0 2 0 2 0 2           2
       3 8 2 5 0 4 8 2 6 0 7 1 4 8 2 6 0 4 7 1 6 0 5 2 5 1           2

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 2/22 ).

Intraday Chart

                 Risk Versus Opportunity Report

                     CCK8    May Cocoa

                      High Price:  2364
                   Current Price:  2146
                       Low Price:  2039

                            Risk:  0.097
                     Opportunity:  0.198

                    (O/R) Ratio =  2.037

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 + 5
Place 11 May Cocoa on a Buy Watch with stoploss @ 1.21 below the get-in point when recent price is represented as "21.46".