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Why would anyone work for free in cocoa?

Posted 07/28/2017 9:30AM CT | Hector Galvan

The cocoa market has given us a resurgence of hope this morning. Just as many people were calling for lower cocoa prices on the idea of a significant world surplus greed exposed its head to help ferry the bulls to the promised land.  However, the question we must ask ourselves now is whether or not the bulls are just in calling this the absolute reversal in the cocoa market.  Yesterday’s big turnaround came on the heels of news that production may change going forward due to many farmers lacking economic motivation. Over the years farmers have negotiated prices just to maintain their slim profit margins.  Thus, with prices hovering at levels not seen in over 10 years why would farmers work for free? Therefore, I would argue the trade is building risk premium into the market to offset possible future shortfalls.  Next, the US Dollar has come off significantly since the start of 2017.  Cocoa, like many other foreign commodities, gets support from a weaker dollar.  If we are on track to continue building up interest rates in the US and aiding in a weaker dollar I can only imagine its role in the cocoa trade moving forward.  Please keep in mind that we must push beyond the 2100 level on the September contract in order to really feel confident that we have a new direction in place.

Sep ’17 Cocoa Daily Chart

Sep '17 Cocoa Daily Chart

Hector Galvan