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A Sweet Trade

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Chocolates, the word itself is enough to elevate the mood because almost everyone loves them. Therefore, along with sweetening the taste buds, we have searched for a trade that is likely to sweeten the portfolio in the medium-term.

Key points

  1. Cocoa prices are quoting near multi-year lows due to over supply
  2. Demand for cocoa products, however, remains strong
  3. History shows that cocoa production is cyclic in nature
  4. The top two producers are taking steps to support prices and avoid a glut in the future
  5. The risk to reward ratio looks attractive for a long-term trade

Cocoa, the main ingredient in chocolate making is quoting near its yearly low. However, we believe that the bottom is in place and cocoa is likely to rally in the medium-term.

What are the uses of cocoa

Cocoa is derived from the cocoa bean and has a history of more than 5000 years. Cocoa is mainly used for making chocolates and its derivatives, something that everybody loves.

So, when cocoa is used for making such a popular product, why is its price quoting near yearly lows?

Price of every commodity is determined by the dynamics of demand and supply. In the case of cocoa, let’s see whether people have suddenly started disliking chocolates or are farmers growing cocoa in large quantities, causing a supply glut.

Chocolate consumption and cocoa production details

Source: Statista.com

The retail consumption of chocolate confectionery globally has seen a gradual uptrend from about 6.946 million tons in 2012/2013 to about 7.3 million tons in 2015/2016. The growth is likely to continue and consumption is expected to reach 7.696 million tons by 2018/2019, according to Statista.com. Between 2007 to 2015, the chocolate market had a compound annual growth rate (CAGR) of +2.3%, according to IndexBox.

Who were the major consumers?

In terms of total consumption, US is the clear leader followed by the UK and France. The world’s top two most populated nations, India and China are far behind. This shows that there is enough scope of growth.

But, is there any proof to show that chocolates have attracted new enjoyers other than the traditional consumers?

To understand this, let’s look at the per capita consumption.

Traditionally, Europe has been a large consumer of chocolates. In 2015, Switzerland was the global leader with a per capita consumption of 8.8 kilograms, closely followed by Germany at 8.4 kilograms. However, according to global market intelligence agency Mintel, sales were flat in the US, UK, Germany, and France between 2015 and 2016.

Nevertheless, while the traditional consumers are plateauing, new consumers are warming up to chocolates and its derivatives.

Russia’s cocoa consumption had an annual growth of 18.1% between 2007 and 2015, which has propelled its per capita consumption to 7.3 kilograms, the third highest in the world.

Similarly, the analysts now expect India to provide the next leg of growth. From 2015 to 2016, India’s chocolate confectionery in retail markets grew by 13%. It is not a one-off growth number because between 2011 to 2015, India recorded a CAGR of 19.9% and the growth is only expected to improve to a CAGR of 20.6% between 2016 to 2020, according to Mintel.

So, it is safe to assume that the growth in chocolate sales is likely to continue for the next few years. Now, let’s look at the supply picture.

Who are the major suppliers of cocoa in the world?

While cocoa consumption is a feature around the world, the production is concentrated in West Africa, which produces about 70% of the world’s cocoa. The world leader in production is Côte d’Ivoire, which alone produces about 30% of the total global production.

The next largest producer is Ghana, which accounts for above 20% of the world’s cocoa production. Third is Indonesia, which is comparatively a newcomer to the group. However, its farms are being infested by the ‘pod bearer insect’, which has resulted in poor roots and poor-quality cocoa bean, severely limiting their rise as a cocoa superpower.

Cocoa bean production over the past decade?

Similar to the consumption of chocolates, cocoa production has increased sharply over the past decade. However, the rise has not been constant. 2010/11 and 2013/14 were bumper years, which were followed by a dip in the following two years.

Including the forecast for 2016/17, there have been five years when production increased, while production fell in the other five years. Nevertheless, the percentage of rise during the up years has been greater than the fall during down years, therefore, production has more or less kept up pace with the increased consumption of cocoa-based products.

The cocoa market keeps shifting from surplus to deficit, as seen in the chart above. Therefore, it is safe to assume that the markets will again fall into a deficit, which will be bullish for cocoa prices. Let’s see the supply and consumption pattern for this year.

So, what is the latest demand and supply situation?

In 2016/17, the International Cocoa Organization expects the global production to increase sharply over 2015/2016, contributing to a global surplus of 371,000 tonnes. A bumper crop in West Africa is likely to keep prices depressed in the near term. Ivory Coast’s bean arrival at the ports from the start of the season to August 20, was 12.6% higher than the previous year.

As a result, Rabobank believes cocoa prices are unlikely to rally a lot above $2000 per MT in the short-term, however, they are bullish in the long-term due to increasing demand.

“The further we go in time, the more bullish our forecast gets,” said Carlos Mera, a commodities analyst with the bank, reports confectionerynews.

In September, the ICCO said: “Major chocolate manufacturers have generally reported improved sales volumes and the low international cocoa beans price is anticipated to encourage cocoa processing activities.”

The sales of candy in the US was up 1.4% year over year and the trend was showing signs of improvement, as the latest four weeks sales increased 2.8% year over year, according to IRI/Bloomberg Intelligence, the Morningstar reported on August 25.

Low prices are pinching the major producers

Ivory Coast and Ghana, which account for over 60% of the global supply of cocoa are struggling due to the fall in cocoa prices. Therefore, they plan to build warehouses to stock the beans during bumper crop season and release them in the market, according to the demand, thereby increasing their influence over cocoa pricing.

“Must we continue on this path, flooding the market with beans in abundance and driving down prices to the detriment of our economies and people? We don’t think so,” said Narcisse Sepy Yessoh, chief of staff to Ivory Coast Trade Minister Souleymane Diarrassouba, reports Reuters.

They have sought a loan of $1.2 billion from the African Development Bank for the above activity, which is likely to be approved by the end of this year and the stocking is likely to start in the 2018/2019 season.

This will put a floor beneath cocoa prices in the medium-term.

How does the technical picture look?

The long-term chart of cocoa futures shows a trading range between $1800 to $3400. This is a well-defined range. An attempt to breakout the range failed in 2011, similarly, attempts to breakdown of the range failed between May and July of this year.

The risk to reward ratio to play the range is attractive. We have a well-defined stop loss below the lows of the range, whereas, our target objective is a rally back to the upper end of the range. However, it will be difficult for the readers to hold cocoa futures for the long-term. Therefore, the next best way is to play it through the two available ETNs, NIB and CHOC.

As NIB is more liquid, we prefer to invest in it. Let’s look at its chart.

Unlike cocoa futures, NIB broke below the lows made in end-2011 and formed a new low at $21.17. It has formed a bearish descending triangle pattern, which will complete on a close below the $21.17 levels. Therefore, we shall initiate 50% of our trade when NIB breaks out of the triangle and 50% of the positions on dips. Let’s determine the specific levels from the daily charts.

NIB has fallen below the $22 levels four times since May of this year. The downtrend line has been a major hurdle to cross. On Friday, NIB again returned from the downtrend line. Therefore, if it again falls closer to $22 levels, a long position with 50% allocation can be initiated. The remaining 50% position can be initiated on a breakout of the descending triangle pattern. The positions can be closed if NIB breaks down and closes below 21 for three days in a row. Once NIB breaks out of $27 levels, its next technical target is $33, though its long-term target remains $45.

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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12 Comments

12 Comments

  1. gullyfoyle

    September 24, 2017 at 5:20 pm

    rakesh, an interesting trade and a pun title. Love it.

    btw that FMSA trade was a beauty. Thanks for making me aware of it.

    Also, I was eating chocolate while reading this article.

    • Rakesh Upadhyay

      September 24, 2017 at 5:42 pm

      Hi gullyfoyle,

      Ha Ha, you already seem to be helping the cocoa trade by eating chocolates. I am glad you benefitted from the FMSA trade. Hope to dig a few more such trades.

  2. felix

    September 24, 2017 at 11:01 pm

    Hi Rakesh,

    FMSA advice was great. Good job! This advice sound nice too.

    Thanks!

    • Rakesh Upadhyay

      September 25, 2017 at 11:25 am

      Hi felix,

      Thank you. Let’s hope this trade also turns out profitable for you.

      With warm regards
      Rakesh Upadhyay

  3. felix

    September 25, 2017 at 11:52 am

    Rakesh,

    what do you think that could be the target price of FMSA?

    Thanks

    • Rakesh Upadhyay

      September 25, 2017 at 1:10 pm

      Hello felix,

      What is your holding period? Are you looking at it as an investment or a short-term trade?

  4. mvppvm_07

    September 25, 2017 at 3:16 pm

    It seems that growers may have incentive to increase production if the warehousing funding comes through for Ghana & Ivory Coast.
    1. Doesn’t the possibility of more acreage for growing beans counter-balance the implied stability of predictable product in warehouses?
    2. Any info on the quality degradation (if any) of “beans in bags” once they’re being stored in warehouses?
    3. Do the major growers have capacity and/or authorization to increase production if they choose?

    I am interested in some source material more than a yes/no response, although I’ll gladly digest your view on these questions. “Teach me to fish” request, really.

    Good substance to your article, by the way.

    • Rakesh Upadhyay

      September 25, 2017 at 6:12 pm

      Hello mvppvm_07,

      You have valid questions. Let me answer them to the best of my ability.

      1. If we think from a farmer’s perspective, he wants a good price for his produce. If price of cocoa is high in the previous year, he is most likely to use all the acreage available to him for growing cocoa. He is not concerned whether the produce goes to the warehouse or to the end consumer. Once he sells the produce, that is the end of it. For him only price matters.

      2. Now, on the second issue. Warehouses. Unlike oil, which can be stored for ages in containers, beans are a perishable commodity. Therefore, if the warehouses are only being stocked, either the beans will rot or they will have to be sold at low prices. Therefore, managing the stock in the warehouse is a delicate balance.

      3. The approximate life of stored cocoa beans is six to nine months, according to this source. https://www.leaf.tv/articles/storage-shelf-life-of-raw-cacao-beans/

      4. There is nothing stopping them from increasing their production. However, before storing beans, the producers are likely to take the consumers into confidence.

      If you have any more queries, please feel free to ask me. Our whole idea is that you become better investors. Whatever little knowledge I have, I will be happy to share it with you.

      And, thank you for the appreciation of the article.

      With warm regards
      Rakesh Upadhyay

  5. felix

    September 25, 2017 at 3:20 pm

    Rakesh,

    thanks for your prompt reply. My hold time usually is several weeks.

    Best,

  6. Rakesh Upadhyay

    September 25, 2017 at 6:18 pm

    Hello felix,

    As the stock has broken out of $4.23 levels, it is likely to rally to $4.9 in the next few weeks. If held for a few months, a move to $6 or higher is likely.

    With warm regards
    Rakesh Upadhyay

  7. mvppvm_07

    September 29, 2017 at 5:24 am

    Rakesh,

    Thanks for the answers to my questions. Solid response and good information. I appreciate your approach to the due diligence you’ve done. Here’s to chocolate. Cheers.

    • Rakesh Upadhyay

      October 4, 2017 at 9:30 am

      Hello mvppvm_07,

      Thank you. I hope the chocolate trade turns out profitable.

      With warm regards
      Rakesh Upadhyay

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Commodities

Brent Crude Oil: $100 Per Barrel Is In Sight

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Crude oil has been moving steadily higher for months, despite a recent short-term blip, and it may not be long before we are looking at triple-digit prices once again. Eighty-dollar Brent is the most recent target, reflecting the highest level the commodity has seen in years and the closest its come to 2008 record highs of $150 per barrel.

And while market forces aka Saudi Arabia may be doing what they can to control the price, there is a wildcard that could send oil futures soaring to near $100 per barrel once again, and according to a market strategist on CNBC, it’s Venezuela.

Bob Parker of Quilvest Wealth Management said on the business network that Venezuela holds the key to unlocking near-$100 oil prices once again. If Venezuela, which is mired in economic depression, were to bring oil production to a total halt, it could serve as an impetus to send crude oil futures soaring to levels not witnessed in years.

A combination of production cuts inspired by OPEC and rising demand around the world has thrust the oil price to the $80 per barrel level in May, back to 2014 levels. Surplus worries have taken some steam out of the rally, at least in the short-term, as the US has been ramping up production. But Saudi Arabia has still been calling the global shots, and they like oil in the $70-$80 range.

The Wall Street Journal

Parker believes that the oil kingpins — Saudia Arabia, other OPEC nations and Russia — have reached their goal to “clear this industry from overhang from the oil market.” It’s been on again, off again for production cues, and if they had their way, oil prices would persist at current levels.

“I think what they are concerned about is that they ideally would like to avoid a spike in the oil price, let’s say towards $100 a barrel, because they are very sensitive to the fact that a spike would then lead to a generalized global downturn,” Parker told CNBC.

Venezuela Wildcard

Energy is the heart of the Venezuelan economy, and therefore it’s the industry that’s been hit the hardest. It’s been displaced by Colombia for oil exports to the U.S., and production has been falling sharply.

Latin American crude production has been slashed by some 40% in the past three years and is currently hovering at about 1.4 million barrels per day amid Venezuela’s hyperinflation and food crisis. If Venezuelan production were to come to a complete halt, and there’s no indication that the worst is over, it could thrust crude futures back to triple-digit- territory.

It’s not just one market strategist that predicts $100 per barrel oil. RBC’s Helima Croft similarly believes that a perfect storm could send Brent up to lofty levels, with the Venezuelan economic demise the deciding factor.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 15 rated postsGerelyn has been covering ICOs and the cryptocurrency market since mid-2017. She's also reported on fintech more broadly in addition to asset management, having previously specialized in institutional investing. She owns some BTC and ETH.




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Commodities

Oil Prices Post Biggest Drop in a Year as Russia, OPEC Weigh Abandoning Output Deal

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Oil prices sold off Friday at their fastest pace in a year after major energy producers said they may soon begin lowering production limits.

Energy Ministers Weigh Easing Output Caps

A group of two-dozen producer nations are considering a gradual exit from an output deal put in place last year to rebalance an oversupplied crude market. Under the deal, Russia, OPEC and others agreed to reduce crude supplies by 1.8 million barrels per day.

Russia was especially vocal about lowering and eventually abandoning output quotas in support of a balanced market after Moscow’s energy minister met with his Saudi counterpart in St. Petersburg.

“The moment is coming when we should consider assessing ways to exit the deal very seriously and gradually ease quotas on output cuts,” Russian energy minister Alexander Novak said, according to Reuters.

Russian President Vladimir Putin also said Friday his country does not support runaway oil prices, a sign that the world’s largest energy producer was prepared to ramp up production soon.

“We’re not interested in an endless rise in the price of energy and oil,” Putin said in St. Petersburg on Friday. “I would say we’re perfectly happy with $60 a barrel. Whatever is above that can lead to certain problems for consumers, which also isn’t good for producers.”

The Russian leader echoed previous comments made by Iranian officials, who indicated that a range of $60 to $65 a barrel was fair market value for crude. The Saudis, meanwhile, were said to be targeting prices above $80 a barrel.

OPEC and its allies are planning to gather in their Vienna headquarters June 22 to discuss a new output deal. Output will most likely increase, though the details of the production rise remain unclear.

Oil Prices Sink

U.S. West Texas Intermediate (WTI) futures plunged 4.2% to $67.70 a barrel, the biggest fall since June 2017. The contract settled at worst level in over three weeks.

Brent crude fell 3.1% to $76.39 a barrel, its lowest since May 8. The international futures benchmark traded above $80 a barrel last week for the first time since 2014.

Energy shares were dragged along for the ride, as the sector fell 2.6%. Dow industrials Chevron Corp and Exxon Mobil Corp fell 3.5% and 1.9%, respectively.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 457 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Commodities

Brent Crude Jumps to $80 a Barrel Amid Geopolitical Fears

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Fears over supply disruptions in the Middle East drove crude prices higher on Thursday, with Brent futures reaching their best levels since November 2014.

Oil Prices Trek Higher

Global energy markets traded sharply higher on Thursday, with Brent crude topping $80 a barrel for the first time in three-and-a-half years. The international futures benchmark, which trades on London’s ICE Futures Exchange, reached a high of $80.33 a barrel for its July contract. That represents a gain of 1.3% from the previous close.

U.S. West Texas Intermediate (WTI) futures also gained and reached a peak of $70.30 a barrel on the New York Mercantile Exchange. Prices were up roughly 0.8% from the previous day.

Oil prices have gained between 8% and 12% over the past month. As a result, energy stocks have surged more than 8% over the same period, far outpacing the broader equity markets in terms of gains.

Energy companies have also been responsible for the bulk of Wall Street’s earnings growth for the most recent quarter. According to FactSet, a financial research firm, energy, materials and technology were the biggest contributors to Q1 earnings and revenue growth.

Geopolitics Sway Commodities

Investors are becoming convinced that President Trump’s exit from the Iran nuclear accord will disrupt oil exports from the Persian Gulf. America’s exit from the agreement restores wide-ranging sanctions on the Islamic Republic, including limits on how much crude it can ship beyond its borders. Combined with record compliance from OPEC and its allies on limiting crude supplies, oil prices look poised to continue higher.

However, not everyone is convinced that sanctioning Iran will prop up crude prices long-term, largely because China and Europe still support the nuclear accord. Some analysts believe that Iran sanctions will wipe 1 million crude barrels per day from the global market. Others say the impact will limited to fewer than 500,000 barrels per day.

Iran is a member of the Saudi-led Organization of the Petroleum Exporting Countries (OPEC), but has expressed diverging views about how oil should be priced. The Iranians are comfortable with $65 a barrel oil while Saudi Arabia is targeting a price point of $80 and beyond.

By reapplying sanctions on Iran, the Trump administration has cost companies like Boeing and Airbus tens of billions of dollars in contracts. France’s Total announced Wednesday it may scrap a multi-billion-dollar gas project in Iran if it could not circumnavigate U.S. sanctions.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 457 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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