Go long on cocoa after Gbagbo – just don’t hold too long

 
Philip Salter
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ACCOUNTING for over 40 per cent of the world’s production, Ivory Coast’s recent political crisis sent the price of cocoa soaring. However, it fell as quickly as it rose, and with the political situation resolved, traders now need to decide whether it has fallen too far or not far enough.

Despite President Alassane Ouattara’s victory at the ballot box in Ivory Coast’s elections at the end of last year, he was unable to formally take office until French special forces arrested former leader Laurent Gbagbo on 11 April. In between, Ouattara had banned the export of cocoa to pressurise Gbagbo’s departure. The US, EU and African Union all upheld the ban to support the rightful victor, and now these prohibitions are being rescinded.

David Jones of IG Markets explains that during the crisis we saw “some big moves in both directions – London Cocoa ran up to 2,400 in March, from around 1,900 at the end of 2010 – but as things seem to be getting sorted out it has gone all the way back down again to 1,900.” Despite these sharp moves, traders have had the distractions of events in north Africa and the Japanese earthquake to deal with. Once the stockpiled cocoa hits the market, the question will be whether the price will drop further or whether the market has already factored this in. Jones says “1,800 has been a floor in recent times, if someone was of the opinion that the price has overshot to the downside there is a good risk reward down here if buying at 1,917 (July London Cocoa) with a stop beyond 1,800, looking for a move back up to the early 20s.”

According to Goldman Sachs’s Commodity Watch paper of 15 April, cocoa will “decline given this year’s large West African production which points to a market in surplus for the 2010/11 crop year and a global stocks-to-use ratio back to its highest level since 2005.” However, the paper cites some medium-term factors pushing the price up: “As demand continues to grow, the production outlook for Ivory Coast will remain key as aging orchards, poor infrastructure and political instability have curbed production and investment over the past few years. Further, while La Nina was beneficial to west African production, a return to neutral weather conditions suggests that 2011/12 production will not be as large as the current crop.”

A bet on cocoa is a bet for or against Ivory Coast. Despite the large amount of cocoa about to enter the market the price should be pushed up in the medium-term. Therefore, if you are hunting for profits, cocoa could be the golden egg you are looking for.