Cocoa: The Sweetest Trade
Sweet chocolate is one of the most favorite candy products worldwide. It has mass appeal to both the young and old in all cultures and regions. Some even claim that chocolate has health benefits and may even be an aphrodisiac. Cocoa is the active ingredient in chocolate and is an actively traded commodity. This article will talk about how you can add cocoa to your trading portfolio and why right now is an ideal time to consider trading it.
Cocoa is traded on the ICE exchange and the contract is priced based on the physical delivery to any of five United States delivery points. Each contract represents 10 metric tons of cocoa and the ticker symbol is CC. The contract months are March, May, July, September and December and it’s traded electronically.
The tick size is $1.00 per ton or $10.00 per contract with no exchange imposed price limits. ICE imposes fees of $1.75 per side on screen-based transactions to non-exchange members and the margin required is $2660.00 initial and $1900.00 per contract to maintain the position. As is normal in the future markets, exchange members need to post less margin. In the case of cocoa, members margin is 1900.00 per contract to initiate and maintain a single contract position.
The technical and fundamental picture for cocoa appears extremely bullish right now. Fundamentally, demand is out-pacing supply. Fortis Bank is reporting that demand will out-pace supply by a huge margin of 29,000 metric tons and the International Cocoa Organization stated that they expect a deficit of around 41,000 tons for this season, per Bloomberg. Cocoa is up 61% in 2008 so far and has risen to the highest price since 1979 on the supply concerns.
Technically, cocoa has taken out the March highs and has been in a strong uptrend since April. As you can see from the daily chart, price is hugging the upper Bollinger Band and RSI is indicating an overbought condition.
Remember in a strong bull trend, markets can remain in an overbought condition longer than most people believe possible. The contract has hit new highs over the last six trading sessions and appears to be on track for additional highs.
David Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.