I last wrote about cocoa in July, 2015 in a piece called “Even Cocoa Starts to Waver In the Face of the Collapse In Commodities.” I wrote that iPath Bloomberg Cocoa SubTR ETN (NIB) had met my price target for selling, and I awaited my next entry point. I passed up two subsequent dips, but particularly ripe buying opportunity has finally arrived…

The iPath Bloomberg Cocoa SubTR ETN (NIB) held up OK in 2015 but a 200DMA breakdown in January gave way to a quick 10% loss.

This monthly chart shows NIB has managed to recover from lows late 2011 to 2013, but remains ff the 2011 high

Source: FreeStockCharts.com

Cocoa has been a resilient commodity given favorable supply and demand conditions. For example, Bloomberg reported the cocoa crop fell to a 5-year low in the 2014 to 2015 growing season. So, it makes sense that prices remained lofty.

The International Cocoa Organization (ICCO) noted in its December, 2015 Monthly Review of the Market that cocoa prices increased 10% in 2015 while the Dow Jones Commodity Index declined by 19%. That divergence is quite significant. Generally, demand for cocoa continues to ride a secular uptrend while supply experiences strong seasonal tugs and pulls. As far as I can tell, the current decline in price has not come from fears of oversupply or a sudden drop in demand. Instead, it looks like cocoa is just suffering from a bit of “catch-up” to the on-going collapse of commodities across the complex.

Here are the two main points from the ICCO’s latest report along with some editorial from me…

• Cocoa prices rallied into November and December to 4 1/2 yer highs on fears that dry weather conditions would impact the cocoa crop in West Africa. Note that this rise was in spite of a fresh rally from the U.S. dollar index (DXY0), so I am surprised that the ICCO partly blamed the strong dollar for subsequent weakening for cocoa prices. The dollar index’s last rally peaked at the beginning of December. See chart below. (It is possible ICCO is referring to the dollar’s strength relative to the relentless weakness in the British pound. Cocoa is quoted from London exchanges as well as in USD).
• Port arrival figures for late December from the Ivory Coast eased concerns about supply. Anticipation of these arrivals is probably a better explanation for December’s price relief.

Fast forward to today, and the news seems to indicate that the selling is simple profit-taking in the face of an increasingly poor environment for financial markets. Dow Jones quotes traders as essentially making those claims. The desire to get out ahead of the North America demand report was also cited as an excuse. Yet, demand numbers from Europe were reportedly strong, so I suspect there is little to fear from the North American report.

Bloomberg reported that the the Ghana Cocoa Board (Cocobod) made a large purchase of cocoa beans from farmers from October 1, 2015 to January 14, 2016 for a 20% year-over-year gain. While these figures remain speculative until the release of official numbers, it suggests a “normal” crop for Ghana while deliveries from Ivory Coast are slowing again (down 9% year-over-year). Net-net, I am thus not expecting an adverse price response from near-term cocoa fundamentals.

The market seems left with the sentiment backdrop. With negativity at extremes, I particularly like getting back into NIB at current prices. The immediate target is around $40 which represents likely resistance from converging 50 and 200-day moving averages (DMAs).

The U.S. dollar index remains strong but is off its most recent high set in early December.

Be careful out there!