Connect with us

Commodities

A Sweet Trade

Published

on

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

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.




Feedback or Requests?

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

You must be logged in to post a comment Login

Leave a Reply

Commodities

Oil Prices Dip Following OPEC-Russia Boost

Published

on

Crude oil was back on the defensive Monday, as the OPEC-induced rally showed signs of fizzling amid apparent geopolitical and economic headwinds. In short: traders are still doubting whether the planned output cut announced on Friday will be enough to drain the supply glut in the face of waning economic growth and lower demand projections.

Rally Falls Short

The U.S. and international benchmarks declined at the beginning of the week, partially offsetting Friday’s short rally. The U.S. West Texas Intermediate (WTI) benchmark swung from an intraday high of $52.81 a barrel all the way back down below $52. At the time of writing, WTI for January settlement was worth $51.91 a barrel, down 70 cents, or 1.3%. Brent crude for February delivery slipped 55 cents, or 0.9%, to $61.12 a barrel.

Natural gas prices were also down on Monday. The benchmark Nymex futures contract dipped 3 cents, or 0.6%, to $4.46 MMBtu.

A stronger U.S. dollar was a primary source of headwinds for commodity prices on Monday. The dollar index (DXY), which values the greenback against a basket of six currencies, rose 0.3% to 96.76.

OPEC+ Deal

On Friday, the Organization of the Petroleum Exporting Countries (OPEC) announced it had reached a deal with Russia to reduce global crude output by a combined 1.2 million barrels per day. The output cut was higher than expected and signaled a renewed readiness to re-balance the market following a two-month collapse in prices. Crude officially entered bear-market territory last month, having lost roughly one-third of its value since the October high.

According to analysts, the decision by OPEC, Russia and their allies should stem the price collapse for the time being and support a recovery towards $70 a barrel. However, it’s not entirely clear whether the strategy is sustainable given the resurgence of U.S. shale and America’s push for energy independence under President Trump.

The U.S. leader has blasted OPEC for its production policies and has called on the cartel not to support any initiative that would raise prices drastically. The Trump administration is relying on competitive crude prices to feed the nation’s economic recovery, which is showing signs of slowing.

At the same time, there are considerable doubts about how the OPEC+ coalition will implement its production cuts. Analysts at Goldman Sachs Group Inc. and Morgan Stanley have expressed concern about whether producers can stay on the same page given how difficult compliance has been in the past.

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.6 stars on average, based on 691 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




Feedback or Requests?

Continue Reading

Commodities

Oil Prices Drop Ahead of OPEC Production-Cut Figures

Published

on

Oil prices faced a brisk selloff Thursday after investors caught wind of news that the Organization of the Petroleum Exporting Countries (OPEC) had agreed to reduce output by an unspecified amount. The Saudi-led cartel is reportedly waiting for Russia to come on board before declaring specific output levels for the new year.

Crude Drops

Both U.S. and international crude benchmarks declined sharply through the morning session. The West Texas Intermediate (WTI) benchmark for U.S. crude futures reached a session low of $50.23 a barrel on the New York Mercantile Exchange. Nymex futures were last down $1.21, or 2.3%, to trade at $51.68 a barrel. WTI recently established a new yearly low of $49.41 a barrel.

Brent crude, the international futures contract, bottomed at $58.36 a barrel on London’s ICE futures exchange. That’s 58 cents higher than the 52-week low. At last check, Brent was down $1.07, or 1.7%, at 60.49 a barrel.

OPEC Reaches Tentative Deal

OPEC concluded its meeting in Vienna on Thursday with a tentative deal to cut production levels. However, the producer group has yet to communicate an official output target as member countries awaited Russia’s participation in the agreement. Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman agreed last week to reduce output levels collectively but Moscow has yet to confirm.

According to Reuters, Saudi Energy Minister Khalid al-Falih said a final decision by OPEC and its allies was likely before the weekend.

It was reported earlier that the 15-member cartel was eyeing production cuts of 1.3 million barrels per day to stem the more than 30% drop in crude prices since October. The two-month slide has been exacerbated by a political standoff between the United States and China, which has undermined the outlook on global trade, economic growth and energy consumption.

U.S. President Donald Trump has been highly critical of OPEC’s production policies. On Wednesday, the U.S. president once again called on OPEC to keep output steady and not support any policy that would raise prices.

Al-Falih on Thursday implied that an output cut of 1 million barrels per day was more than enough to drain excess supply from the market. That’s because Canada recently called on its producers in Alberta to slash output levels by roughly 325,000 barrels per day.

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.6 stars on average, based on 691 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




Feedback or Requests?

Continue Reading

Commodities

Palladium Tops Gold for the First Time in 16 Years

Published

on

Palladium, gold’s lesser known sister metal, extended its rally to new record highs on Wednesday in a buying frenzy that has been fueled by a major shift in the automotive industry.

Outshining Gold

For the first time in 16 years, the price of palladium has topped gold. The shiny, silvery metal used in primary manufacturing jumped $24.21, or 2%, to $1,250.22 an ounce on the New York Mercantile Exchange. The spot price peaked at $1,261.80, according to Bloomberg, and is now trading 51% higher than its August low.

Palladium’s technical indicators show strong momentum in the underlying price, though the relative strength index (RSI) suggests that the market has entered overbought territory.

At the same time, spot gold drifted slightly lower to $1,237.16 a troy ounce. The yellow metal has gained significant ground over the past four weeks, with prices rebounding 3%. However, gold’s returns have been less reliable with the seven-year bear market showing little signs of abating.

The crossover in price has been largely driven by improving fundamentals in the palladium market and a prolonged supply crunch that is making the cost of borrowing extremely expensive. As Bloomberg notes, “Holdings in exchange-traded products backed by palladium are at the smallest in almost a decade as investors pull the metal and offer the commodity for lease.”

The cost to borrow the metal for one month has reached a record high of 22% amid the buying frenzy.

Severe Shortfall

Palladium is a key commodity in gasoline-powered automobiles and is expected to see higher input in the future as markets shift away from diesel fuel. At the same time, the shift toward electric vehicles is also expected to catalyze the use of palladium in the foreseeable future. This has created a severe shortfall of available palladium, with the London-based Metals Focus Ltd. forecasting a deficit of 1.4 million ounces next year.

As Hacked reported last month, investors should keep a close eye on raw materials over the next two years as the market for electric cars heats up. The International Energy Agency (IEA) expects there to be 125 million electric vehicles on the road by 2030, up from just 3.1 million last year.

The supply crunch isn’t just limited to palladium, but includes primary metals such as copper, aluminum and nickel. Following years of underinvestment, the price of raw materials could skyrocket next year as demand grows and investors scramble for available supplies.

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.6 stars on average, based on 691 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




Feedback or Requests?

Continue Reading

Recent Posts

A part of CCN

Hacked.com is Neutral and Unbiased

Hacked.com and its team members have pledged to reject any form of advertisement or sponsorships from 3rd parties. We will always be neutral and we strive towards a fully unbiased view on all topics. Whenever an author has a conflicting interest, that should be clearly stated in the post itself with a disclaimer. If you suspect that one of our team members are biased, please notify me immediately at jonas.borchgrevink(at)hacked.com.

Trending