Is Ebola really the Cause of the Cocoa Move? by Attain Capital

If you haven’t been paying attention to the Cocoa market the past couple of days, it’s certainly been on the move. How big of a move? An 11%, Coo-Coo for Cocoa Puffs kinda move since the end of last week. That would be like the Dow going from 17,000 to 18,870 in a week!

Ebola Cocoa

(Disclaimer: Past performance is not necessarily indicative of future results)

Now by the headline, you’re already gathered that some are linking this sudden move to the Ebola outbreak in Western Africa. There are 5,800 confirmed cases in Guinea, Liberia, Sierra Leone, and Nigeria. What’s more troubling is just this week; the CDC estimated that the outbreak could reach 1.4 million cases within the next four months.

Our thoughts are with the people in these countries fighting to stop the spread of such a deadly disease, and we hope the Red Cross, the CDC, and WHO can effectively find a way to control what could turn into (if it isn’t already) a pandemic in Africa.

In the meantime, if Ebola does spread as fast as the CDC predicates, the disease could easily find its way into neighboring countries like The Ivory Coast, and Ghana. And that’s where Cocoa comes into the picture. Those two countries produce around 60% of the world’s Cocoa. The Wall Street Journal explains that this would halt exports of the crop, because of the way Cocoa is transported.

“Cocoa is grown on tiny plots, with growers selling their beans to middlemen who ride from farm to farm on motorbikes gathering the crop to transport to the coast for export. The travel restrictions and quarantines used to contain the disease could quickly isolate millions of farmers, choking off supplies to the world’s chocolate makers.”

This also seems good and logical until you take a step back, and think about the big picture. The first case of Ebola was identified back in March… and Cocoa was actually lower a few months later in May, before inching, and now shooting, higher.

Ebola Cocoa

(Disclaimer: Past performance is not necessarily indicative of future results)

So is this jump in the market really due to the Ebola outbreak or a preemptive move in the markets in fear that cocoa could be affected by this awful disease. There’s no doubt that people have placed trades for lesser reasons than this one. And for those (5 or 6 people) who trade Cocoa based on fundamentals, this is the million dollar question – is it a technical breakout with legs, or a short term spike caused by potentially misplaced fear.

But for those who trade systematically, like Global Macro and Managed Futures programs – it doesn’t really matter why it’s shooting up, only that it is shooting upwards and making new highs, signaling an uptrend for some. If want to get into the nitty gritty on how these programs identify trends (and when they end), download our Trend Following education piece here.

“The Managed Futures Blog is a compilation of thoughts, research, attempts at humor, and more from the team at Attain Capital Management (“Attain”). Attain pairs high net worth individuals, RIA’s, and institutional investors with alternative investments in commodities, managed futures, and global macro strategies through privately offered funds and managed accounts. Click here to sign up for their insight and analysis.”