Weighing Up The Cocoa ETN
Cocoa is a small so volatile futures market, with supply arising from just eight countries worldwide. Cocoa can easily slip between surplus and shortage. Chocolate grinder companies have been buying the price lows established from over supply last year, so represents an interesting investment now on the long side. Volatility can create opportunity, (a single futures tick is $10.00), but equally, mistiming can be costly.
The secretariat ICCO record cocoa prices daily and also release monthly bulletins. It pays to keep a close eye on all news releases as changes in supply, demand and weather conditions can influence trading.
Any direct commodity investment can also risk backwardation and cantango issues. Both risks can be reduced by investing in an ETN which tracks cocoa, (although there’s corporation risk from the issuer) and there are two popular ones.
Ipath Bloomberg Cocoa NIB link http://www.etf.com/NIB
Ipath Pure Beta Cocoa CHOC link http://www.etf.com/CHOC
NIB offers greater liquidity, and an average service ratio cost, and Pure Beta CHOC offers closest upside performance. A comparison is available from www.stockcharts.com. It can be very expensive to trade continually, (a free expense calculator is available here). Timing is crucial. Let’s take a look at COT and stock charts for technical insight next.
The Cocoa Market Demand and Supply Fundamentals
The ICCOs last September issue discusses increasing worldwide production. Increased consumption though is already reducing inventory, and November news includes a framework agreement to halt Ivory Coast deforestation. News is bullish.
Weather And Crop Cycles
Most cocoa beans are exported from Ghana and Ivory Coast. There are two main harvesting seasons, based on a six month fruiting cycle. The chart below illustrates that a seasonal price low is generally experienced in mid November, on both a 15 year and 1 year composite.
2016/17 season increased production well above 2015 numbers, no doubt why the market reacted so poorly to news of another increase. However looking at 2010, supply increased that year by 18.6%, (as opposed to 18.1% for 2016/7). Remaining stocks from 2016/17 are expected to be less than during either 2008/9, 2010/11, or 2011/12. Market prices during those years should offer some insight into recent sentiment. ICCO confirm a recovery in global demand for cocoa beans, based on their September numbers.
Cocoa Demand Rises
ICCO reported in September:
Source: ICCO September Review
Commitment of Traders Charts
From the long term COT (Commitment Of Traders) chart, we can see that:
1) On a monthly level, cocoa is developing a bowl shaped bottom, on a long term supported price level equivalent to the highs of 2003-2007, but lower than trading between 2012 and early 2013.
2) After an early consolidation (purple), trading generally advances to at least the length of a single wave identified in dark green. Between 2001-2006, 2007-2011, and 2012-2016, there have been three peaks. The last series weakening from over supply. The last consolidation phase following a reversal from a longer term low, was in 2013, and that initial bounce developed in two phases. (Fractals can develop in long and short term patterns).
3) Managed money was shorting the market even while commercial producers were going long.
The RSI on the daily chart is not yet oversold. While that isn’t necessary, selling could still continue. A prolonged bull leg needs to continue the trend of the green diagonal support line. If trading fails that line, there is potential buying support near the 200ma and the S1 buying support level.
NIB full stochastic is weekly over bought, despite the RSI pausing near 52. The bowl low, implies downside near term trading could just test $23-$24. NIB weekly hasn’t as yet completed wave 3 or 4 of a 5 wave rising Elliot Wave sequence, with wave 5 outstanding, it reduces risk of failure at $23.
Cocoa ETN are probably rising to R1, R2 selling resistance, despite over bought oscillator weakness. Cocoa turns seasonally bullish after mid November, current news and long term price lows support bulls. A minor wave 4 correction must hold support near the weekly pivot to continue into a 5 th wave rise to R2; (comparable to a Bar chart purple wave). To the downside, a failure at the green diagonal trend must hold 2017 lows.
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I have written this article myself. I don't own shares or futures currently, and have received no remuneration for this article.
M J Fountain
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.