The Truth of the Cocoa Bean

Today’s Daily Reckoning reiterates what you might have heard already. It’s the idea that the price of cocoa is your best guide to gauge just how big the threat of Ebola in West Africa is.

At the very least, I’m sure you’ve heard some scuttlebutt in the media about rising chocolate prices. That’s because West Africa dominates the cocoa bean supply. For the moment, the Ebola outbreak is mainly in the countries of Sierra Leone, Liberia and Guinea.

According to my 2013 CRB Commodities Yearbook, the countries that account for about two-thirds of world cocoa production are Ivory Coast, Ghana, Nigeria and Cameroon. Ivory Coast, which happens to be next door to Liberia and Guinea, is the biggest producer. Not only that, the main crop harvest in West Africa is in September and October.

What happens from here depends on the containment effort. The news isn’t exactly encouraging, if the Wall Street Journal is to be believed.

The paper reported from Liberia on October 12:

Some of the teams sent to retrieve bodies of suspected Ebola victims here are collecting cash instead, allegedly accepting bribes to issue death certificates to families saying their loved ones died of other causes and leaving the body, locals and health workers say.

It is a troubling development for an outbreak in which dead bodies are a major source of contagion and one that suggests local corruption could help undermine the international effort to contain the virus.

That’s where the price of cocoa can help. Below is a chart of cocoa for December delivery.


The price has obviously been trending higher over the past year, but you’re certainly not seeing any panic-like spikes…not yet anyway.

Of course Ebola is much, much bigger and more serious than its effect on cocoa prices. And here at The Markets and Money we send our thoughts for the lives lost and those bravely helping those stricken.

But I mention cocoa because it seems to me a better guide to whether the situation is under control in West Africa than whatever line governments take to placate a nervous public. A chart can tell you a lot — a government orchestrated news conference tells you nothing.

There are certainly a lot of people looking at the chart of oil right now and what it’s saying about the world economy. Both West Texas and Brent prices are holding around $US83–84 at the time of writing. Officially, oil is now in a bear market. Some argue it’s signalling deflation and poor demand. But you can build a case that it’s the supply gushing out of the ground in the US that’s more important.

Of course, if you’re just looking for trades, it might not even matter. Oil is down, no doubt. But that’s not to say you can no longer make money at all in energy. The performance of African explorer FAR Ltd [ASX: FAR] in recent months is proof enough of that. It’s up 242% in two months.

When ‘wildcat’ companies like FAR find potentially big reserves, the share price can take off regardless of the commodity price. Subscribers to Australian Small-Cap Investigator were on for the ride with FAR.

If you like to watch the stocks making new highs, another example this week is Orbis Gold [ASX: OBS]. It’s almost doubled in the last ten days with pretty much no help from the gold price after a takeover approach. And its focus is on West Africa, of all places. The key is to watch the individual charts.

These are the kind of breakout stocks Jason Stevenson’s lining up over at Diggers and Drillers. As our resource analyst, he’s been watching oil particularly closely, even with oil getting smacked around. Here’s Jason’s take on why:

‘As the Middle East geopolitical conflict heats up, the world has entered into a stage where all the easy oil has been found. To access what’s remaining, companies are drilling deeper than ever before and searching new frontiers. It’s exciting stuff.

‘New oil and gas discoveries have been found in harsh environments everywhere — the Arctic, ultra-deep waters, and even shale. Technology has made this possible.

‘Because of this tech, exploration risk in new frontiers is the lowest it’s been. And as we’ve seen with a number of companies recently, successful wells have returned shareholders more than 100% gains almost overnight.’

Jason will release a report later today to give you more detail on the best companies drilling and exploring on the frontier. Stay tuned for that…

Military analyst John Robb also chimed in on Middle East oil this week. You might recognise the name after he appeared at our World War D conference earlier this year.

Robb made the point in his Global Guerrillas blog that ISIS operates as an open source insurgency that can spread very quickly to new areas as new groups join in. Point being: in his eyes, Saudi Arabia is vulnerable to an ISIS expansion. That’s because ISIS could find huge support from Saudi Arabia’s young male population. They’re educated in the strict literalist tradition and exult in the historic resurgence of ‘a jihad in the medieval tradition’.

Arguably the country with the most to lose from that is actually China. The most important market for Saudi oil now is actually Asia. The US has shale oil. China does not.

Here’s a thought to end the week: Would Beijing send troops to defend the House of Saud? I have no idea, but we might find out in 2015.


Callum Newman
For Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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