Cocoa: Can supply figures be overstated?

Ghanaian officials insist that the 900,000-tonne-plus crop is the result of a significant escalation of fertilizer use and that they have brought tree disease under control.

The first signs of poor quality cocoa in the Ivory Coast have emerged. Press reports claim that the most recent port arrival included 15,000 tonnes of beans that were not eligible for export at all. The export standard was always 105 beans per 100 grams. Ivorian officials have lowered the standard for this year’s mid-crop to 125 beans per 100 grams citing “exceptional circumstances” as a result of the war.

So while the headlines may speak of extraordinary tonnage, the by-product content has obviously been compromised.

Second-quarter grind results for Europe and North America will be released in a few weeks. Even a small uptick will be bullish news, because we are now seeing an ever increasing amount of origin grinding activity. Indonesian and Malaysian grindings are estimated to be 20% and 10%, respectively, above last year’s.

If nothing else, the 2010-11 season has illustrated the vulnerability of the cocoa market to the Ivory Coast’s position of being the provider of one third of the world’s cocoa beans. We’ve muddled through, again, but just barely. It remains to be seen just how much of the 1.3 million tonnes is actually acceptable for Western chocolate manufacturers.

While commodity funds have generally been net-long commodities, cocoa has been an exception. They are giving up and have begun to cover their short positions, which leaves a fair amount of short covering fire power to exacerbate the rally that we feel confident is around the corner.

The bull is hardly tame. We recommend reentering the long side.

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