It has been over a year since we discussed the cocoa futures market in depth. Last February we discussed the seismic changes in the political landscape of Côte d’Ivoire and the paradigm shift in cocoa farming practices that this would facilitate. African politics being what it is, it should come as no surprise that two years later there is less hope and change than was originally sold to the people of the country. The result may cost First World cocoa consumers quite a bit of money in 2014.
Politically, the situation revolves around the handling of war crimes committed by the freely elected president of Côte d’Ivoire, Alassane Ouattara, during the rule of the previous regime up to and including the 2011 elections. Ouattara received almost unanimous international support for his campaign, which was literally focused on bringing the average Ivorian out of the Stone Age. Outtara, who was educated here in the US at Drexel and the University of Pennsylvania, rose to deputy director of the International Monetary Fund. He harnessed these connections on a platform based on modernizing a country that had been under the dictatorial regime of Laurent Gbagbo for more than a decade.
The main current dispute is an issue of jurisdiction between the International Criminal Courts and Outtara’s desire for a national prosecution. However, the real source of the conflict lies in the fact that supporters of Gbagbo and Outtara committed war crimes. The International Criminal Court considers war crimes to be war crimes regardless of the current regime in power. Outtara has been willing to give up his former adversaries, but has not only shielded his own from international prosecution, he has promoted some of his closest minions to positions of power within the current political system, leading to trust issues. among the already distrustful indigenous population.
This brings us to the cocoa futures market itself. Some of Outtara’s plans to rebuild his nation are being implemented. Cocoa prices are determined more fairly than before. The minimum payments are more in line with global market prices and the infrastructure is doing a better job of processing and sending it. In general, modern agronomic practices coupled with increased foreign direct investment will drive cocoa prices down over time as the market simply becomes more efficient.
Lower price expectations seem to have gotten ahead of the reality of African politics. Commercial traders began selling cocoa futures in earnest late last summer and continued to sell until early this year. Commercial traders set a new net short record of nearly 100,000 contracts in late December and tested that number again in early February as Côte d’Ivoire braced for a bumper mid-crop (cocoa is harvested twice a year). While the harvest has progressed as expected, the waning hope and change ushered in by Ouattara’s Western leadership style is being replaced by uncertainty and hoarding of the current harvest.
This sets the stage for a rare and potentially volatile market situation. Despite record commercial sales, the cocoa market is up another 10%. More importantly, we are seeing the market consolidate above $2900/tonne. Commercial traders have been actively buying back their short covers since the February lows and have now been buyers for six straight weeks. It is rare for traders as a group to decide that they are wrong. Buying back your net short position at these elevated levels could send the cocoa futures market above its recent highs of $3,039 per tonne. There is an old rule in technical analysis that says: “consolidation equals next”. This could easily cause cocoa futures to top $3,300 per tonne ahead of the main harvest in September-October.