Cocoa: Not bad for bearish fundamentals

The advent of the powder market has been supporting demand and helps to decipher – at least in part – the enigma of how cocoa prices remain steady at multi-decade highs.

It is, we believe, highly unlikely that crops in Ghana shot up by such a wide margin in such a short period of time, while at the same time, neighboring Ivory Coast was able to crank out a bumper crop despite the fact that the industry was virtually shuttered for months during the main-crop season.

A plausible explanation is that smuggled beans were double counted. Smuggled beans usually move from Ghana to the Ivory Coast to take advantage of higher prices, but went the opposite direction this year, as Ivorian farmers became frustrated by earning no income at all.

The Ivory Coast data are somewhat more believable because it has produced crops of similar size in the past and the arrival data published by the government matches – more or less – the parallel figures provided by exporters. Ghana has never produced anywhere near the amount of beans the official agency Cocbod is reporting and there is less transparency as we don’t see the weekly numbers provided by exporters to the government. Aside from musings in press reports, there is no evidence to corroborate this theory. Time will tell.

As a result of our skepticism, we question forecasts that call for such a healthy surplus. As well, it’s hard not be impressed with the action of a market that has been generating nothing but apparent bearish news.

We’re a bit offside on our June 29 recommendation to establish long positions. Place stops at $2,800, basis nearest contract, close only.

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