Tuesday, January 25, 2011

Remarkable Reversal of Fortue in Commodities as 2010's Laggards Turn into 2011's Winners; Ivory Coast Bans Cocoa Exports

2010 was very much the year of commodities as almost any on earth ex natural gas, cocoa, and rise shot through the roof.

Year to date performance as of Dec 23, 2010:

[click to enlarge]

As if a switch was flipped on Jan 1, 2011 - speculators have migrated from the winners of 2010 and into the laggards.  Who are the 3 leaders this year thus far?  The 3 laggards of 2010.  It's as if speculators ran from the overbought names to the oversold name physical supply and demand suddenly changed between Dec 31st and Jan 1st.

A couple key developments - first Ivory Coast's government has put forth a one month ban on exports as of yesterday.  Now this is not a stable government so we'll see how it goes, but with the country's dominant position in the commodity (one third of global exports) it will be interesting to see what develops.  But chocolate is a treat for the world's well off; more worrisome is the action in rice.  Remember, for all the wheat, corn, and soybeans surging that is more of an issue for the relatively rich West.  The staple food in the East is rice, where many more are in poverty, and that commodity was shielded from The Bernank in 2010.  This was the commodity that caused all sorts of troubles overseas in 2008; so if the current path continues expect some 'excitement' in the coming months. [Mar 19, 2008:  Philippines Brace for Rice Shortage]  [Apr 6, 2008: Agflation Hits Rice - Prices Up 50% in 2 Weeks]  This certainly could be another reason we are seeing such weakness in many emerging market stocks as the U.S. and Europe whistles Dixie.

More on the cocoa situation:
  • Cocoa prices are surging after a one-month export ban was imposed in the Ivory Coast, where there is an escalating struggle for control of the government.  
  • Cocoa futures on the Liffe commodities' exchange in London were up 3.9% Monday to 2,223 pounds per ton, the highest since early August, after trading as high as 2,290. Cocoa traded as low as 1,770 pounds in November.   Prices have risen 12% since Jan. 5th.
  • Alassane Ouattara, the internationally recognized leader of the African nation, on Monday imposed the export ban as he tries to take control of the government away from incumbent president Laurent Gbagbo, who is refusing to step down.  
  • The export ban was proposed .... as a move to choke off funding for the incumbent.  It is unclear whether the ban will be heeded by cocoa growers or how it will be enforced.  
  • In Washington, the Obama administration announced it was supporting the ban on cocoa exports.
  • Ivory Coast was divided into a rebel-controlled north and a loyalist south by a 2002-2003 civil war. The country was officially reunited in a 2007 peace deal, but the long-delayed presidential election was intended to help reunify the nation. Instead, the U.N. says at least 260 people have been killed in violence since the vote.
  • Ivory Coast exported $2.53 billion worth of cocoa in 2009, according to government statistics. Ivory Coast's production has been declining, from 38 percent of global production in 2007-2008 to 33 percent in 2009-2010.
  • "The real risk is that if this escalates into military conflicts, which is distinctly possible, the first things to be targeted will be cocoa trees and cocoa fields," said Spencer Patton, founder and chief investment officer for hedge fund Steel Vine Investments LLC.
  • Marcia Mogelonsky, U.S.-based global food analyst for Mintel, said retail chocolate prices are destined to rise even if the political situation in Ivory Coast stabilizes in the next few weeks.  "The prices will go up because cocoa is now more expensive," and the price of sugar is also rising,Mogelonsky said.
  • More recently, she said, some manufacturers have, in effect, been raising chocolate prices by shrinking the size of their products.

Conclusion?  If you are an American time to start hoarding that 24 oz chocolate package, before it turns in the 18 oz package (same great price!).  [Jan 5, 2011: [Video] ABC News - Consumer Reports Shows People are Paying for Less]  One of the hundreds of millions poor in Asia who need rice?  Just log in to your Etrade account and invest in the U.S. stock market to make up for the inflation in foodstuffs.  The Bernank can make us all rich.... you just need a brokerage account.

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