Supply trouble to keep cocoa futures on an upward trend
WITH oil and gold constantly hitting the headlines, it’s all too easy for spread betters to take the (relatively) easy route and stick to trading the big commodity markets. But given how strongly some of the so-called soft commodities such as cocoa and sugar have performed over recent months, it is clear that extending your range of markets can open up plenty of opportunity for profit.
US December cocoa futures hit a 30-year high of $3,400 a tonne on Friday during intra-day trading, the highest settlement for the nearest month contract since February 1980.
Strong results from Hershey, Cadbury – which is currently being pursued by US food giant Kraft – and a weak dollar were among the factors pushing cocoa to these multi-decade highs.
But while you might reasonably think that the commodity is now due a sell-off and take out a short position, the fundamentals actually suggest that it might still be worth spread betters going long from here.
Barclays Capital analyst Gayle Berry says that longer-term fundamentals remain supportive on structural supply-side problems and recommends buying the March 2010 ICE cocoa contract.
Although cocoa has been boosted in the very near-term by the threat of a strike in the Ivory Coast – the world’s largest producer of cocoa, accounting for 40 per cent of global output – there are still concerns about production in the African country.
In the 2008-09 growing season that ended in September, it is estimated that its cocoa output fell 11.6 per cent to 1.2m tones. Prospects for the new growing season remain clouded because of insufficient investment, ageing trees which yield less, and crop disease.
These supply-side issues should continue to exert upward pressure on the price of cocoa. And on the demand side, cocoa should benefit from a big pick-up in demand from grinders – firms which grind down the cocoa bean into powder which can then be transported – as there has been heavy destocking of confectionary throughout the supply chain in the past year.
Spread betters have a choice of whether to trade the US or UK cocoa market. The US market sets the global benchmark and prices the physical delivery of exchange-grade product from a variety of African, Asian and Central and South American origins to any of five US delivery ports.
The most significant difference between the two markets that spread betters should bear in mind is the impact of the exchange rate. For example, when US cocoa futures hit highs last week, gains in the UK market were capped because of the stronger pound on the day.
Through IG Index, the UK Liffe market can be traded between 9.30am and 4.50 pm with a spread of four basis points. In contrast, the US market is open from 9am until 7pm, making it more appropriate for part-time and evening spread betters. But note that the spread is slightly wider at six basis points for the US market.
Cocoa might not be the most obvious spread bet market and its vulnerability to weather conditions mean that prices can be extremely volatile. This offers spread betters ample opportunity to play the daily fluctuations in the cocoa price. However, those with a longer-term appetite for chocolate could also consider a strategic buy at the current price to keep their profit/loss account looking sweet.