There is a telling move in cocoa and there are some strong suggestions as to why when looking at the fundamentals.
In the world of cocoa the worlds foremost producers are the Ivory Coast and Ghana, with the former taking the first place and Ghana second. Politically this is not a region without troubles and the usual take has been that Ghana is the more stable of the two.
In 2011 troubled elections in the Ivory Coast sent bean prices rising in a not unusual market reaction.
This year in Ghana, the traditionally more stable one of the two, we saw the death of the president John Atta Mills who went by the name Asomdwehene or ‘King of Peace’. This increases uncertainty in the region over stability. Ghana were quick to put the Vice President in a care taking role which seemed to keep a lid on a potentially volatile reaction. However, the real test comes in December this year where elections will take place.
Recent actions by the Ivory Coast could well see prices spiraling out of control.
They have set up the Cocoa and Coffee Council in order to try and protect farmers from price volatility. To do this they sell most of the national crop well in advance of harvest and they are guaranteeing to pay farmers 60% of the advance prices.
This all could go very wrong if futures prices continue to rise. This will mean that farmers will get considerably less from the government than they would get in the spot market. If the payout price falls too short of the futures price farmers could chose to default on pre-agreed sales, sell at market prices or even resort to smuggling in order to sell in next door in Ghana. This mess would see those cocoa dependent businesses racing to gather supplies and an obvious spiral upwards of the price.
In addition to these issues Macquarie estimates suggest production is set to be down for a second season in 2012 – 2013 with a shortfall of more than 100,000 tonnes as a result of drier than usual weather.
These factors add support from the fundamental side to the move that looks to be underway in cocoa.