Wednesday, February 15, 2017

The Bottom in Cocoa?

I think it is. It's always hard to catch falling knives, but in this case I think the risk/reward is there.

- Cocoa is cheap on a long run basis. The forward 10-year graphs that I run have it about doubling in the next 10 years. That's not a basis for a trade, but it's a good start. Note: I no longer publish these.

- We are beginning to get some bullish info out of Africa. The rain event in early Feb was unusual and quite bearish. Since then however, dryness has continued. Also, Reuters has an article about how cocoa is being left on the trees to rot (overly dramatic, but with a grain of truth). The official Ghana cocoa agency reduced its 2016/17 crop estimate by 50K tonnes. I doubt that this is accurate, but it shows that the producers are starting to do things to move prices up.

- Commitments of traders is VERY one sided. There have been very few times in the past ten years where the specs have gone short cocoa; all have ended with bull markets. We are at record short now.

I believe the last leg down was due to defaults by some medium size cocoa middlemen. I have no knowledge of, but wouldn't discount the possibility of, a western trading company being in trouble as well. This new selling added to the decline. This is probably over, or nearly so.

I bought a half position via options in CCK two days ago. If we can get some further upside action, I will double up.


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