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Cocoa in Crisis?

Cocoa may not be in crisis, but Cote d’lvoire may be. The connection? Cote d’lvoire is the world’s largest producer of cocoa.
This West African country with a population of 20.6 million is in the midst of a presidential election crisis. In short, election results of the recent November 28, 2010 presidential election are being contested with the incumbent and losing candidate encouraging wide-spread demonstrations. The U.S. Department of State on December 19, 2010 released the following travel warning to American citizens: “…based on the deteriorating political and security situation in Cote d’Ivoire and growing anti-western sentiment, the Department of State has now ordered the departure of all non-emergency personnel and family members.” 
Cocoa is an interesting commodity in that 54% of production is from only two countries: Cote d’lvoire—35% and Ghana—19% (World Bank, Dec. 2009). There are approximately 5-6 million cocoa farmers worldwide with about 40-50 million people who depend upon cocoa for their livelihood. The current global market value of the annual cocoa crop is $5.1 billion. Demand has on average increased annually about 3% for the past 20 years. It takes five years for a cocoa tree to produce its first bean and the “peak growing period” for the average cocoa tree is 10 years. (World Cocoa Foundation 2010)
Cocoa “grinding” or the processing of cocoa beans is used as a measure of demand for the key chocolate ingredient. The Netherlands is the number one country in cocoa grinding while Europe has the most volume by region. (International Cocoa Organization: Aug. 2010)
While business activity has been disrupted by the current political unrest, cocoa exports thus far have not been significantly impeded. It is uncertain how political disruptions may affect the production and import/export activity of a given commodity. As of the date of the writing of this article, conditions in the country remain “on the edge” of either stabilizing or descending into a greater level of uncertainty.
Investors may want to refer to a couple of cocoa commodity securities such as iPath DJ-UBS Cocoa Sub-Index ETN (NYSE/ARCA: NIB) and the ETFS Cocoa (London Stock Exchange: COCO). The price of NIB has risen from $39.72 per share to $43.85 (12-28-10 mid-day) or 10.39% since the date of the presidential election. (The mention of these securities should not be construed as a recommendation to buy, hold or sell by the author.)
(Tom Fyler is President of Commodities & Securities, Inc., a Registered Investment Advisor, and a Registered Commodity Trading Advisor (CTA) with the Commodity Futures Trading Commission (CFTC), and a member of the National Futures Association (NFA). Mr. Fyler may be contacted at info@EssentialsInvesting.com. Additional information about Directed Commodity Securities Investing may be viewed at www.ManagedCommodityETFs.com.)
 

Special Risk Disclosure: There are special risks involved when investing in exchange-traded commodity securities that have not been presented or detailed in this article. Investors should make every effort to learn and understand these risks before making a decision whether to invest. Mention in this article of a particular exchange-traded commodity security should not be construed as a recommendation to buy, sell, or hold such security. Investors should obtain and read a prospectus for any exchange-traded security before deciding to invest.
Risk Disclosure: This communication is for informational purposes only and should not be construed as containing or providing specific investment or financial advice. Readers should be aware that there is risk of loss of some or all funds when investing in stocks, bonds, mutual funds, ETFs, real estate, commodities and/or currencies any of which may not be appropriate for all investors, and that there is a risk of loss when using any particular trading, hedging or investing strategy. This information may contain statements or forward-looking propositions that should be understood as the opinion, belief or preference of the writer. 


Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NIB over the next 72 hours.

Additional disclosure: Mr. Fyler does not personally own any of the positions cited in the article. Clients of Commodities & Securities, Inc. may or may not at any given time hold--long or short, positions cited in the article.