Cocoa on the Run

By JMTG’s Head Analyst James Mound

November 8th, 2004

A massive rally in cocoa since last Thursday has been brought about due to a massive uprising in the Ivory Coast, the world’s largest producer of cocoa.  A deeper look into what is happening in this market reveals a whole other layer of tradable fundamental shifts.

The Ivory Coast, a relatively small African country on the upper lip of the Gulf of Guinea (west coast of Africa), provides approximately 2/3rds of the world’s supply of cocoa.  Combined with its neighboring country Ghana some estimate that the two countries provide almost 90% of the world’s cocoa.  Both countries are the extreme 3^rd world and the Ivory Coast is run by an unstable government lacking in power.

Last Thursday, in what still remains a questionable event, the Ivory Coast military accepted responsibility for “accidentally” killing 9 French peace keeping officials in an air raid of the rebel held town of Bouake (many view the Ivory Coast as a divided country, with rebels holding power in the north).  Nevertheless, the air raid represented a break in a cease fire created almost a year ago and a resumption of a violent civil war that began back in September 2002.

As a retaliation, the French military assaulted the Ivory Coast’s puny military arsenal and destroyed all 5 helicopters and both war planes that essentially make up all of the government’s aerial forces.  Now France sits almost literally on the doorstep of President Gbagbo, apparently ready to take over his residence and in essence take control of the Ivory Coast.  Once a French territory, the Ivory Coast has long been a ‘pet’ for French President Chirac and with the current military force being sent over there one must acknowledge Chirac’s intent on taking this country over in short order.  So, what does this mean for the cocoa market?

The Ivory Coast has long been a corrupt and difficult exporter of cocoa and if France truly intends on taking over the Ivory Coast then we have the potential to go from a 3^rd world exporter to a 1^st world one.  And, unlike our own efforts in Iraq, the takeover and effective reconstruction of the Ivory Coast should be relatively quick and easy for the French and could have an immediate impact on the ability for improved exportation of the cocoa crop.  Moreover, corruption among the political heads in the Ivory Coast and neighboring Ghana has allowed for price fixing in an industry that would soon see price relief if France truly takes over the exportation practices of the Ivory Coast.  While the market continues to inflate prices on concerns about future exportation capabilities one must ask how high can we go and where do we go from here.  Unlike the rally in the later part of ’02, the current market condition does not have the element of market manipulation it had when it ran to 2400.  Back in ‘02’s rally, some 20% of the market’s physical cocoa was said to be held by one individual speculator squeezing the market during a complimentary civil upheaval.  This current situation is not the same, and could allow for a massive reversal once the French calm this situation down.  I highly recommend tight trailing stops on long cocoa futures (1744 on the Dec. after today), and the buying of puts as this market approaches 1900.  Alternatively, France could back off which would create a choppy and more difficult recovery, hence extending the rally time frame.  Traders should watch France’s participation to determine the length of time we will see inflated prices.

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