Cocoa Quieted by Ghana Supply, Japan
Today's Idea
Cocoa market fundamentals are a bit unclear at the moment. The healthy Ghana crop has given chocolate makers a fallback. However, these stockpiles may be running thin, which threatens the overall market supply if no resolution is reached soon. Technically, the chart shows a downward bias after support at 3250 was broken. The 3100 mark now becomes an important support level. Some traders may wish to consider buying a May Cocoa futures contract at a limit of 3105, with a stop at 2990 and an upside target of 3275. The trade risks roughly $1,150 and has a profit objective of $1,700.
Fundamentals
Cocoa futures have been on the decline over the past two weeks as a result of economic sanctions against the Ivory Coast. Politicians are hopeful that this could force a transition from the incumbent regime to a more outwardly friendly Ouattara regime. Currently, the Cocoa industry in the embattled nation is at a standstill. Chocolate makers have made up for the shortfall in Ivory Coast exports by stepping-up imports from Ghana, but it may only be a matter of time before supplies start running thin. The excess crop in Ghana has given users of Cocoa a fallback buffer, and commodity markets have been negative since the Japanese earthquakes and subsequent tsunami. However, the Cocoa market will likely ultimately look to the Ivory Coast situation to dictate market direction. If the situation continues to drag on, meaning the current regime refuses to abdicate power, there may be genuine supply concerns. Even with a transition, there is no way of knowing how much spoilage has taken place. A peaceful transition of power and low spoilage rates could send prices sharply lower.
Technical Notes
Turning to the chart, we see the May Cocoa contract breaking several key technical levels on the downside in recent sessions. We have seen two consecutive closes below the 50-day moving average. Also, prices have violated support at the 3250 level on the downside. The next area of support comes in just below the 50-day moving average at 3100. Closes below this level suggest prices could test the 3000 mark and, possibly, the 2750 level. The recent selloff has brought the RSI down to oversold levels, which could result in short-covering and, possibly, some cherry-picking by value buyers.
Rob Kurzatkowski, Senior Commodity Analyst
