Fundamental Analysis
With a combination of sun and rain in July but wet and cold in August raised fears the Black Pod disease has become more wide spread. Also among the fears is the pesticide shortage with only around 30% of the farmers needs for pesticide fulfilled in and around Daloa.
The crop may reach record size but the quality of the beans may not be as good. The farmers really have no choice but to use the poor quality beans. This will definitely move the prices with more poor quality beans in the harvest.
Emerging markets with more money, we should expect to see them consume more chocolate. Fortis Bank has also raised there expected shortfall to 29,000 tones from 6,000 in June. Due to the extra demand. This would be the third straight year of demand outweighing supply.
Ivory Coast has doubled its port registration tax on cocoa and coffee exports to 10 percent of the cost, insurance and freight (CIF) price to help cope with rising fuel prices, a presidency statement said on August 9, 2008. The port registration tax is one of a range of levies imposed on cocoa and coffee exports.
Seasonally, September and October are months of weakness for cocoa but with the mid crop ending and the outlook for the main crop unpredictable. Cocoa should if anything trend sideways or slightly lower before the turn around in November.
Now lastly, we have seen a large run up in the USD and a small drop in cocoa prices, we see a correction in the USD we should see another jump in Cocoa prices.
Technical Analysis
March 09 contract just closed above the 100 day, 50 day and 39 day moving averages after coming close to tapping the 200 day moving average. 10 day RSI just broke above the 50 mark two days ago and stochastics are looking to the upside. Should probably see a retracement of yesterdays run up, today or in the beginning of the week.
Trade Recommendation
The trade recommendation for Cocoa is a Bull Call Spread or a straight call. I am looking for the bull call spread more than anything just in case we get a good correction in September/October. If that happens we can look at buying the call we sold back for a profit and hold onto the one we purchased.
Buy the March 09 Cocoa 3000 call and sell the March 09 Cocoa 3300 call for 90 or $900.00. Or buy the straight March 09 cocoa 3600 call for 100 or $1000.00. Straight call option has unlimited profit potential and the bull call spread has a profit potential of $2100.00 minus commissions and fees. It is a low risk to reward ratio at only 3.3 to 1.
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