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'Contrarian mindset' of investors in cocoa ETPs pays off

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The “contrarian mindset” of exchange traded products in cocoa is finally paying off.


Investors in exchange traded products (ETPs) as monitored by ETF Securities sold out at a record pace last week (on data going back a decade), with net outflows of $18.6m.


The selldown came even as prices extended to 28% their gain so far in 2018, offering a reward to investors many of whom had been sitting on long bets for a year or more, and a performance beaten only among carbon by commodities that ETF Securities covers.


“Between August 2016 and May 2017, cocoa ETPs saw close to $84m of inflows, when prices fell close to 45% over that period. Investors appeared to be bargain-hunting,” said the London-based group.


“Now that cocoa prices are rising once again, up 35% since December, many investors may be thinking of taking profit.”


Fund behaviour


The behaviour of investors in cocoa ETPs stands in stark contrast to that of hedge funds, which built up an extensive short position in the bean as prices fell to a low of $1,769 a tonne in New York in June, the weakest in nigh on a decade.


The managed money net short in New York-traded futures and options hit a record high of 52,334 lots in July, and remained substantial even into January – before being slashed as prices soared, in a shift which will have spelled losses for many speculators.


Hedge funds, which were net short in New York cocoa by 25,729 lots as of January 16, were net long by 30,7662 lots as of a week ago.


‘Contrarian mindset’


By contrast, while many funds are momentum traders, betting on further movement in assets already showing strong direction, ETP investors show “a bit of a contrarian mindset at times”, said Nitesh Shah, director commodities research at ETF Securities.


For them, cocoa’s underlying dynamics, which sees more than 60% of production stemming from just two countries, Cote d’Ivoire and Ghana, make bargain hunting appealing.


“Many of them fell that with the large concentration of where cocoa is grown, it only takes a small supply disturbance to turn the market around,” Mr Shah told Agrimoney.


‘Surplus could turn into a deficit’


Indeed, it has been worries over output in both Cote d’Ivoire and Ghana which has spurred the cocoa rally, with ETF Securities flagged that “the presence of cacao swollen shoot virus in Cote d’Ivoire could limit the regions’ producing capacity in future years as maintenance programmes need to be undertaken to reduce the spread of the virus”.


The virus, transmitted by insect pests, typically causes severe yield losses to trees, and often death.


Separately, Commerzbank flagged the boost to prices on Monday “as concerns about supply from West Africa receive further fuel - the Ghana Cocoa Board expects the country to produce only around 700,000 tons in 2017-18.


“The upcoming mid-crop in particular is set to yield only a very small amount due to a lack of rainfall.”


While the International Cocoa Organization has forecast a world cocoa output surplus of 105,000 tonnes this season, that was based on a forecast for Ghanaian output of 900,000 tonnes.


“In other words, the small surplus expected by the ICCO could turn quickly into a deficit because of Ghana alone,” Commerzbank said.

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