Cocoa Used this Week to Base Itself Out | RJO Futures

We are now in a situation where we have to look into the next couple of months for direction.  We have much of the evidence that analysts use to track the market out of the way.  Grind numbers for the 4 ^th quarter of 2016 were not ideal, but were also not catastrophic for cocoa.  In addition, a mild Harmattan in West Africa will likely keep mid-crop disruptions to a minimum, if any at all.

Cocoa was trading at around 2800 at the start of the 4 ^th quarter of 2016.  It was one of the toughest quarters in many years, as the price of cocoa began its trend down to 2200 over the span of 3 months.  Many argued that stagnant demand due to high prices, and the overwhelming supply from farmers who needed to sell, weighed the price down.  Grind numbers illustrated that North America and Europe were not quick to consume at those levels.  Yet, the Asian market blew expectations out of the water by coming in almost 17% over the same time a year ago.  I would argue that the longer we stay at these prices, the more demand we will have from end users who will use these prices to hedge long-term, and from producers that will likely hold back future sales until we see a bounce back to 2400-2500.

Additionally, the Harmattan, a dry easterly wind that blows out of the Sahara from December to February in West Africa, has been mild this year.  This phenomenon has been known to block out the sun and devastate crops by stunting the pod yield.  The dry wind is so powerful that it can break trees and increase the risk of fires.  Luckily, this year the Harmanttan has spared the growing region from having to calculate down yields for the mid-crop.

I have been looking at different strategies to take advantage of scenarios that would see higher prices in the next few months.  At this point, both futures and options look to be viable roads to take.  However, options can mitigate some of the pressure by giving a trader defined risk on a longer term hold. Feel free to drop me a line and we can discuss strategies in more detail.