Breaking News

A Top In The Price Of Cocoa

By Dr. Duru CommoditiesApr 08, 2018 04:07AM ET
A Top In The Price Of Cocoa
By Dr. Duru   |  Apr 08, 2018 04:07AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

On March 8th, I finally took profits and sold the rest of my holdings in iPath Bloomberg Cocoa Subindex Total Return Exp 24 June 2038 (NYSE:NIB). In the past week, NIB came back down to my price and the ETN closed below my selling price to finish the week. I now think the price of cocoa, and thus NIB, has topped out for now.

The iPath Bloomberg Cocoa SubTR ETN (NIB) suddenly looks toppy. The three long red bars surrounding the last surge to multi-month highs have the look of sellers taking back control of the trading action.


Anatomy of a top
The topping action began with the deep pullback on March 19th that took NIB off the 16-month high at that time. Buyers stepped back in and were rewarded with a surge to new 16-month highs 4 and 5 days later. During that time, the Coffee and Cocoa Council (CCC) projected “Ivory Coast’s mid-crop cocoa output is expected to drop 23 percent this season due to insufficient rain and poorly kept fields” according to Reuters. The projected 400,000 tonnes is 120,000 tonnes short of 2017’s mid-crop production. I previously observed that the strong rally in cocoa was about cocoa forecasts coming up short of previous production numbers, so this news was not much of a surprise even if I had no expectation on specific numbers.

With cocoa up so much already, the classic trader concern is whether price action has finished pricing in the catalyzing news. The trading action following the news is often a good tell: if the price action reverses, traders do well to assume the catalyst has finished its work. Risk/reward dictates ending the trade with an easy re-entry if the price action resumes with a new high (or new low in a downtrend).

With the last surge to 16-month highs quickly giving way to downward price pressure, I think the answer is in: sell the news.

A top confirmed
Buyers had one last chance to prove that upside remained…and they failed. On April 2nd, NIB made a new intraday 16-month high but faded. Reuters reported that “speculators increased their net long position slightly to the highest since August 2016, showing less short-covering took place than some had expected, according to data that was released on Friday, when the markets were closed.” This speculative positioning is quite a turn-around from the record SHORT positioning that plagued cocoa in 2017. This high level of bullishness is a classic warning sign in commodity markets: it begs for a price reversal as increasingly supportive news is required to sustain the trend and supporting market sentiment. The release of the Ivory Coast mid-crop projections is that final news.

A flip in the narrative
With speculative position at lofty heights, news came from Ivory Coast that contradicted the forecast. According to Reuters on April 3rd: “Ivory Coast cocoa farmers said their trees were loaded with ripe cocoa pods and that sunny intervals last week enabled crops to dry, quelling fears that low rainfall earlier this year might have hit production.” NIB lost a whopping 5.2% on that day. This selling essentially confirmed a top in price.

On April 6th, Reuters blamed another cocoa sell-off on “improving crop prospects in Ivory Coast.” The narrative on cocoa has apparently changed. From here, I fully expect speculators to rapidly unwind longs and bring the price of cocoa down with them.

An ode to the cocoa farmer
While speculating in cocoa has been a modestly profitable exercise, there are of course millions of farmers for whom cocoa prices are the essence of life. Last week, PBS Newshour Weekend interviewed Dr. Kristy Leissle about her book “Cocoa

"which “examines the politics that go into [cocoa’s] production with an analysis of power and inequality in the cocoa industry.” Leissle is currently based in Accra, Ghana and spent more than 10 years researching chocolate.

The somber interview included statistics like the huge gap between the value of cocoa beans and the final finished good of chocolate: $8B versus $100B a year. I reported earlier about the efforts of the governments of Ivory Coast and Ghana trying to figure out how to cooperate in securing more of the added value for their own people. These people, the farmers in particular, have to fight to make a living. According to Leissle:

“…they’re 90 95 percent or smallholder farmers which means they own very little small plots of land and they grow a tiny fraction…They live in really challenging conditions. The infrastructure that we enjoy here is not present in the areas where cocoa farmers live. And so things like paved roads and running water and electricity. Usually they don’t enjoy those things so it’s a very challenging life.”

Leissle estimated that the typical farmer makes $2 to $3 per day averaged out over time and shares that income with a family. Traders like me can clear that amount in a flash while at worst suffering finger cramps on the keyboard. The contrast is sobering for me. In coming months and years, I will be focusing more and more on the economic dynamics of the cocoa industry while weaving in the (episodic) trading opportunities. (For example, I will be looking for bounces at support from the 50 and/or 200-day moving averages).

A Top In The Price Of Cocoa

Related Articles

A Top In The Price Of Cocoa

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email