Is Ebola really the Cause of the Cocoa Move?

If you haven’t been paying attention to the Cocoa market the past couple of days, it’s certainly been on the move. How big of a move? An 11%, Coo-Coo for Cocoa Puffs kinda move since the end of last week. That would be like the Dow going from 17,000 to 18,870 in a week!

Cocoa Daily moves(Disclaimer: Past performance is not necessarily indicative of future results)

Now by the headline, you’ve already gathered that some are linking this sudden move to the Ebola outbreak in Western Africa. There are 5,800 confirmed cases in Guinea, Liberia, Sierra Leone, and Nigeria. What’s more troubling is just this week; the CDC estimated that the outbreak could reach 1.4 million cases within the next four months.

Our thoughts are with the people in these countries fighting to stop the spread of such a deadly disease, and we hope the Red Cross, the CDC, and WHO can effectively find a way to control what could turn into (if it isn’t already) a pandemic in Africa.

In the meantime, if Ebola does spread as fast as the CDC predicates, the disease could easily find its way into neighboring countries like The Ivory Coast, and Ghana. And that’s where Cocoa comes into the picture. Those two countries produce around 60% of the world’s Cocoa. The Wall Street Journal explains that this would halt exports of the crop, because of the way Cocoa is transported.

“Cocoa is grown on tiny plots, with growers selling their beans to middlemen who ride from farm to farm on motorbikes gathering the crop to transport to the coast for export. The travel restrictions and quarantines used to contain the disease could quickly isolate millions of farmers, choking off supplies to the world’s chocolate makers.”

This also seems good and logical until you take a step back, and think about the big picture. The first case of Ebola was identified back in March… and Cocoa was actually lower a few months later in May, before inching, and now shooting, higher.

Monthly Cocoa Move(Disclaimer: Past performance is not necessarily indicative of future results)

[Tweet “”Is this jump in the market really due to the Ebola outbreak or a preemptive move in the markets in fear that cocoa could be affected by this awful disease.”]

So is this jump in the market really due to the Ebola outbreak or a preemptive move in the markets in fear that cocoa could be affected by this awful disease. There’s no doubt that people have placed trades for lesser reasons than this one. And for those (5 or 6 people) who trade Cocoa based on fundamentals, this is the million dollar question – is it a technical breakout with legs, or a short term spike caused by potentially misplaced fear.

But for those who trade systematically, like Global Macro and Managed Futures programs – it doesn’t really matter why it’s shooting up, only that it is shooting upwards and making new highs, signaling an uptrend for some. If you want to get into the nitty gritty on how these programs identify trends (and when they end), download our Trend Following education piece here.

One comment

  1. This will be an interesting situation to watch. I can see the possibility of completely different scenarios unfolding. First is, the disease abates in time for crops to be harvested, the flow of cocoa beans to cocoa butter producers uninterrupted, and no shortages. So prices would revert back to normal ranges. I feel that, at the moment, is the most likely.

    The second is, the disease continues to rise exponentially, workers flee the area, ships refuse to dock in the ports, the flow of beans grinds to a halt producing a shortage, and prices soar. I think we will know before December if this will happen.

    The third scenario is probably the least likely, but one of those type things that often catch people by surprise: if ebola becomes a significant threat here despite CDC assurances, there may be an irrational but understandable fear of anything from the west coast of Africa. The demand for chocolate could nose dive, resulting in an over supply regardless of the situation in Africa, and a corresponding drop in prices.

    We live in interesting times. Since my wife is a chocolaholic, I think I’ll go long in Choc just to ensure I can afford her addiction. Good luck in your trades.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

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