Cocoa is looking bullish from both technical and fundamental standpoints, and is likely to see prices rise despite a global recession that has dampened demand in many commodity markets. Cocoa futures are facing a unique situation, with poor weather creating supply pressures. Front-month March 2009 futures are actually trading higher than December 2009 futures, an unusual situation that confirms the supply pressures.

I’d consider a bullish position in the December contract, which is trading at a deep discount to the March contract. It seems to have formed a base around $2,000 per tonne. After moving a little below $1,950, the contract started breaking key resistance and moving higher. March 2009 ICE cocoa futures were recently up $76 to $2,638, while December 2009 futures were up $49 to $2,529.

Fundamentally, Ivory Coast cocoa farmers are reporting poor crop conditions. Uncommonly wet weather in August and September brought the onset of black pod disease, which hit the number one grower in the region. More recently, the key growing region has seen excessively dry and warm weather that is seen likely to stunt crop growth. This combination of bad weather conditions has cut into the harvest in the Ivory Coast, and there were reports that Ghana was also facing problems with its crop.

According to a Reuters report, Ivory Coast cocoa administrators have cut their forecast for this year’s crop to 1 million tonnes, down from about 1.3 million last year. Separately, Fortis reported production will fall short of demand by 45,000 tonnes in the 2008-09 season. Global output will be 3.58 tonnes, down from last month’s estimate of 3.71 million, Fortis said.

Exports from the Ivory Coast ports for shipment fell 30 percent in November from a year earlier. Shipments of the beans dropped to 79,297 tonnes, from 113,193, according to data supplied by the ports of Abidjan and San Pedro last week.

Speculators have been increasing their bullish bets on cocoa. According to the latest data from the Commodity Futures Trading Commission’s Commitments of Traders Report (December 19, 2008) speculator long positions topped short positions on the ICE Futures Exchange by 15,333 contracts.

As far as a trading strategy, I recommend buying the December $2,600 call and selling the December $3,000 call. These calls expire right around harvest time in 2009. Your defined risk on the trade would be the cost of the spread at approximately $1,200, plus your commission charges. If the market moves in your direction, your profit potential is $4,000, not including commissions.

Feel free to call me with any questions you have about this strategy or others to suit your particular account size and risk tolerance. Ask about our special half-off commissions offer for new clients.

Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at800-803-8037 or via email at

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