Global food prices rose 1% in April, with levels now only 9% below the peak reached in February 2011, according to the United Nations. This was driven predominantly by a sharp rise in dairy prices. Considering that I can count on one hand how many times my clients and I have traded milk futures… I'm looking at other food commodities within this trend. Cocoa's open interest and volumes make it a much more liquid futures market to trade.
Could the recent rise in cocoa play into that global food price figure? As cocoa prices have appreciated 17% from their lows on March 7th, it seems likely. But in my opinion, the easy money has been made on cocoa's bullish trade and I'm calling an interim top. Futures have just broken below the 9-day MA (red line) and are on the verge of penetrating the 20-day MA (light blue).
I think prices could retrace 5% from here, taking July futures back down to 2225. Do I think the run is over in cocoa? No… but from a trading perspective, we should reverse course and play the other side over the coming weeks. In fact, several contracts in the softs sector have interesting set ups. Serious investors should take a look at these, including OJ, sugar, and coffee, along with cocoa.
My suggestion for cocoa is to gain bearish exposure with either back ratio spreads or short futures while selling out-of-the-money puts 1:1. Avid readers of my analysis may remember that I've previously pointed to the strong correlation between cocoa and the British pound. I have speculative clients in bearish cable trades as well, with the expectation of seeing depreciation in the coming weeks.
Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor's needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.