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Hershey's: Is A Chocolate Correction Coming?

Rahul Salgia profile picture
Rahul Salgia


  • Commercial hedgers (smart money) are the most net long cocoa futures.
  • Non commercial money (dumb money) is the most net short ever.
  • Hershey's and cocoa futures usually have an inverse relationship.

Cocoa prices fell sharply over the past year, and Hershey’s (NYSE:HSY) stock has done well during that time. That trend should reverse as cocoa prices are most likely going to bottom out.

Commercial hedgers (smart money) are net long 31,486 cocoa futures contracts as of 06.27.2017. Compared against the last two decades, this is the largest net long position ever for these investors. The last time they were this net long was in April 2003 with over 29,453 contracts net long. On the other hand, non-commercials (dumb money) are net short 38,256 contracts. Compared against the last two decades, this is the largest net short position for these trend traders. Before this year, the last time they were this short was in 2003.

The dumb money consists mainly of hedge funds, trend followers, and CTAs. While some of these individuals make money, most of these individuals are wrong at position extremes. The same pattern occurred in 2012 when they shorted at the bottom and were extremely long at the top last summer. If the same pattern holds true this time, the non-commercials are going to lose big on their short position.

Although smart money is extremely bullish, there are some negative fundamentals regarding the cocoa market. Recently, the International Cocoa Organization increased its surplus forecast by 382,000 tons. In addition, the ICCO raised its forecast for global production in 2016-2017 to 4.69 million tons, which is 18.1% higher than last year. Most of the surplus came from the Ivory coast.

When prices contract, farmers don’t stop planting cocoa trees, unlike for other crops like grains. The farmers keep their trees when prices plummet, but limit usage of fertilizers and pesticides. Rather than let supply and demand come into equilibrium, this process slows it down, and keeps prices lower.

If cocoa

This article was written by

Rahul Salgia profile picture
I like to be a contrarian investor/trader. I use various technical/fundamental/contrarian analysis to make trades. I have a youtube channel where I discuss my thoughts about market direction.

Analyst’s Disclosure: I am/we are long NIB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am shorting a put contract of sugar and two put contracts of cocoa in the futures (this is a bullish bet). I am also long one contract of cocoa futures.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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