Cocoa prices are rising

It has been more than a year since we did not discuss the cocoa futures market in depth. Last February, we discussed seismic changes in the political landscape of Côte d’Ivoire and a paradigm shift in cocoa cultivation practices that would make it easier. As African politics is what it is, it should come as no surprise that two years later there was less hope and change than was initially sold to the people of the country. The result could cost First World cocoa consumers a penny in 2014.

Politically, the situation revolves around the freely elected president of Côte d’Ivoire, Alassane Ouattara, who is dealing with war crimes committed during the previous regime’s rule until the 2011 elections. Ouattara received almost unanimous international support during its campaign, which focused on the literal removal of the Middle Ivorian from the Stone Age. Outtara, who was educated here in the United States, in Drexel and the University of Pennsylvania, has risen to deputy head of the International Monetary Fund. He built those ties into a platform based on modernizing a country that had been under the dictatorial rule of Laurent Gbagbo for more than a decade.

The current title dispute is a matter of jurisdiction between the International Criminal Courts and Outtara’s desire for internal prosecution. However, the real source of the conflict lies in the fact that supporters of both Gbagbo and Outara have committed war crimes. The International Criminal Court treats war crimes as war crimes, regardless of the current regime. Outtara was ready to give up his former opponents, but not only did he protect his own from international persecution, he raised some of his closest supporters to positions of power in the current political system, thus raising trust issues among and without that the cautious local population.

This brings us to the cocoa futures market itself. Some of Outtara’s plans to rebuild its nation are being implemented. Cocoa prices are more fairly determined than before. Minimum payments are more in line with world market prices and the infrastructure does a better job of handling and delivery. In general, modern agronomic practices, together with increased foreign direct investment, will reduce cocoa prices over time as the market simply becomes more efficient.

Expectations of lower prices seem to have outpaced the reality of African politics. Traders began selling cocoa futures in earnest late last summer and continued to sell until earlier this year. Retailers set a new net short record of nearly 100,000 contracts at the end of December and tested that number again in early February as Côte d’Ivoire prepared for a bountiful mid-harvest (cocoa is harvested twice a year). As the harvest progresses as expected, the dwindling hope and change introduced by Ouattara’s Western leadership style is being replaced by the uncertainty and accumulation of the current harvest.

This creates the ground for a rare and potentially volatile market situation. Despite record sales, the cocoa market rose another 10%. Most importantly, we are seeing market consolidation above $ 2,900 per tonne. Retailers are actively buying back their short hedges from the February lows and are now buyers for six consecutive weeks. It rarely happens when retailers as a group decide they are wrong. Buying their net short position at these higher levels could cause the cocoa futures market to jump above its recent highs of $ 3,039 a tonne. There is an old rule in technical analysis, which states: “consolidation equals continuation”. This could easily lead to an increase in cocoa futures above $ 3,300 per tonne before the main harvest between September and October.