Cocoa Demand Reports Preview: Buy the Rumor Sell the Fact?

Last week I laid out the bullish case for cocoa in light of an impressive 21 percent run up last year thanks to supply issues and robust demand. Today and tomorrow, data from North America and Europe will help clear up the demand questions from the last quarter of 2013.

The deluge of data begins with the European Cocoa Association releasing measurements on the amount of cocoa beans processed in the fourth quarter 7 a.m. GMT Wednesday. Washington-based National Confectioners Association will follow suit and release its own data at 4 p.m. EST on Thursday for North America.

Analysts across the globe are in agreement that cocoa grindings increased year-over-year last quarter. According to Reuters, analysts polled believe North America cocoa grindings will increase five-to-7.4 percent compared to 2012. Bloomberg conducted its own poll with analysts for the European data and they expect grindings to increase 4.1 percent during the same time period.

The bullish sentiment is justified. Recent headlines from Reuters point to increasing demand. U.S. chocolate sales in October (Halloween candy sales) notched a five percent increase year-over-year versus expectations of one percent. Across the pond, Swiss chocolate maker Lindt & Spruengli published a Q4 sales increase of 8.6 percent thanks to strong North American numbers.

The futures market has taken notice. Today the ICE Cocoa March contract closed up $40 a ton, settling at $2,752, three ticks below the intraday high, after buying picked up just a few hours before the close.

Looking at the cocoa futures chart below, we see a breakout from the ascending wedge pattern (white lines) after the failed bear move to end the year. This move coupled with strong bullish sentiment should keep bears on edge.

The daily front-month ICE cocoa contract

The daily front-month ICE cocoa contract

However, that can all change with some bearish demand data. This might be a “buy the rumor, sell the fact” situation. The cynic in me thinks the run up Tuesday may be part of an insider pump-and-dump scheme, praying upon bullish headlines to lock in prices before an impending crash. The bullish data is probably already priced in. Furthermore, I keep hearing about how cocoa arrivals from the west African harvest are stronger than expected. Once we get through the data this week traders will return their attention to Africa.

Momentum Favors Higher Prices

Regardless of what may happen, I’m taking my chances from the long side. As I described earlier, I examine three main criteria before entering a trade: a technical breakout, fundamental basis and matching sentiment. Thus far we have the bullish technical breakout and the matching bullish sentiment. Now we need confirmation of the bullish fundamental basis.

Should the market sell off following the data release, this may mark a top and I’ll instead be looking to reverse my position and go short. Until then, I remain bullish eyeing a break above the 2013 high set last month.

P.S., if you don’t feel comfortable trading futures contracts, take a look at the iPath cocoa ETFs, including (CHOC) and (NIB) for opportunities to gain exposure.

Please Note: I am currently long ICE Cocoa.

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