Beginning of African Harvest Should Cool Hot Cocoa Prices

Beginning of African Harvest Should Cool Hot Cocoa Prices



Beginning of African Harvest Should Cool Hot Cocoa Prices

Volatility Inflates Call Premiums at Strikes Market has Never Achieved

The hot, dry winds arrived early this year on Africa’s West Coast. It wasn’t war, famine or turf disputes that threatened the Ivory Coast’s cocoa crop this year. It was rain. More specifically, it was lack of it.

Cocoa, which everyone has eaten but few have ever invested, is actually a powder derived from the fruit seeds of the cacao tree. Like any other tree, cacao trees need a certain amount of rain to bear numerous and healthy fruit. The dry weather pattern associated with the beginning of 2015’s El Nino provided less than desired amounts for African cacao trees.

For the cocoa market on New York’s ICE exchange, this is a big deal. Africa (in particular Western African nations such as the Ivory Coast and Ghana) account for nearly 73% of global cocoa production. Thus, supply issues here can have an outsized impact on price.

World Cocoa Production by Region

Africa accounts for nearly 73% of global cocoa production

Indeed, in the Ivory Coast (the world’s largest producer of cocoa), main crop production is expected to be down 100,000 metric tons from last year’s 1,720,000 metric ton harvest.

As a result of lower African production, the 2015/16 crop year is expected to see cocoa at a global supply deficit of 100,000 tonnes or more.

Cocoa traders have been aware of this for some time, which is why cocoa prices have defied the bearish trend of many commodities this summer and have marched steadily higher since early April.

March 2016 Cocoa

Cocoa prices have rallied since April off of lower expected production from West Africa.

Is Cocoa Near a Top?

One of the core tenants you learn here is never to try to pick tops or bottoms. As an option seller, of course, you don’t have to. A continued downgrade of the Ivory Coast or Cameroon crop (Ghana seems to have escaped the worst of the weather) could certainly push prices higher. However, at a certain point in any weather event, the market reaches a point where supply shortfalls are priced in. This market has had 6 months to price lower cocoa bean yields. It feels long in the tooth. In addition, a number of other factors are now accumulating that indicates call selling could be a high probability play for investors at this time.

These include:

  1. The Approaching Main Crop Harvest: The main crop cocoa bean harvest in Western Africa begins in September/October and last through the first quarter of next year. As with any other agricultural market, supplies at harvest will be higher than at any other time during the year. This often translates into lower prices during harvest time. Indeed, cocoa prices have tended to follow such a pattern (see chart below) in year’s past. (Although past performance is not indicative of future results).

    March Cocoa Seasonal Price Tendency

    Graph-Cocoa-30yr seasonal

    In year’s past, cocoa prices have tended to weaken with the start of the West African harvest in September/October.

  2. Supply Deficit not as Severe: A 100,000 metric ton global supply deficit sounds like a shortage. But a supply deficit does not mean there is not enough supply to meet demand. It only means for any given crop year, the world used more of that commodity than it produced. It does not take into account supplies in storage from years past. As recently as 2011, the world had a cocoa deficit of 234,000 metric tons. Prices that year were lower than 2015. 2014/15 Ending stocks, while not records, will be more thto cover the shortfall, for now. We must keep in mind that although the Ivory Coast may be down 100,000an adequate tonnes of cocoa this year, that represents only a 5.8% decline from last year’s total harvest.

    World Cocoa Ending Stocks Graph

    2014/15 Ending stocks will help make up 2015/16’s Cocoa Supply Deficit.

  3. Macro Factors: Weaker emerging economies in 2015, a strong dollar (in which ICE cocoa is priced) and a general “risk off” vibe of the markets in general are not favorable for individual bull markets. While cocoa has managed to defy these factors for much of the summer, their drag grows heavier as prices continue to climb.

Conclusion and Trading Strategy

Hot dry weather has clipped 2015 cocoa production and fueled a six month price rally in the market. However, much of the shortfall is likely priced into the market by now. With main crop harvest already getting underway in West Africa, prices could begin to feel pressure as the new supplies accumulate. In addition, the outside market environment is not favorable to bulls.

The rally has created some welcome volatility in the Cocoa call options at the ICE. While cocoa prices have fallen back in recent days, there is still good premiums to be had selling the March Cocoa (CCH) 3800 calls (cocoa is priced in dollars per tonne.) March Cocoa futures are currently trading near 3300 per tonne (see chart on above.)

More conservative premium collectors can look for additional rallies in cocoa to sell the March 3900 calls for premiums in the $500-$600 range. Cocoa has never traded as high as 3900 per tonne in it’s history.

A downturn in cocoa prices this fall could mean taking profits in these options as early as December. Consider risking to 2 ½ times premium.

Selling calls in cocoa futures may sound exotic to those used to following the daily swings of the DOW and the 10 year note. But it’s simply another commodity in a diversified commodities option selling portfolio. The fact that others may fear or not understand it is your advantage. Using common sense fundamentals like these is how you put it to use.

If you’d like to learn more about selling options in cocoa and other commodities through’s Trademarked “Quantum Leap” program for high net worth investors, you can get all of the details in our comprehensive Investor Discovery Kit at or by calling 800-346-1949.

James Cordier is the author of McGraw-Hills The Complete Guide to Option Selling, 1st, 2nd and 3rd Editions. He is also founder and president of, an investment firm specializing in writing commodities options for high net-worth investors. James’ market comments are published by several international financial publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg Television, Fox News and CNBC. Michael Gross is director of Research at His published research articles have appeared on, MarketWatch,, and Yahoo Finance.

*Price Chart Courtesy of CQG, Inc.
Fundamental Charts courtesy of The Hightower Report
Seasonal Chart courtesy of Moore Research, Inc

***The information in this article has been carefully compiled from sources believed to be reliable, but it’s accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.

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