The bull market in cocoa came unglued in early 2011 when it became apparent that the Ivory Coast was going to grow, harvest and export a record crop despite violent political turmoil that engulfed the country. Prices plunged as bullish bets were unwound.
With record crops in the Ivory Coast, Ghana and Cameroon, the global production/consumption surplus for 2010-11 was huge. Estimates ranged between 350,000 and 500,000 tonnes. According the International Cocoa Organization (ICCO), 2010-11 ending stocks are estimated at 1.723 million tonnes, or 44.5% of consumption.
On the demand side, the fourth-quarter grind results showed some growth, but were a disappointment in terms of market expectations. The European grind rose by 1.8%, while the U.S. grind grew 1.49%. So, with a burdensome carry-over from 2010-11 and ho-hum consumption patterns, the bears are in charge. Or, so it seems.
In the early part of the season, arrivals at Ivorian ports were running consistently ahead of last year’s pace. As recently as late-December, port data showed arrivals ahead of last year by as much as 85,000 tonnes. At the very least, output should be tied with last year’s, if not, larger.
Private forecasters started warning that the extremely dry weather would hurt crops and that the bounty would be short-lived. As we detailed in our previous discussion, cocoa deficit forecasts for 2011-12 began to emerge, but they were hard to take very seriously with arrivals so strong and sluggish growth in grindings.
It seems, however, that output has fallen behind. As of the most recent arrivals-status report released Feb. 6, arrivals stand at 897,000 tonnes, down from 957,000 at this time last year. Most analysts have already switched from earlier forecasts of small global surpluses for 2012-13 to estimates for a deficit of 100,000 tonnes.
One analyst estimates that Ivorian output will fall by as much as 350,000 tonnes. With no improvement in the dry weather, the midcrop could be a disaster as well. There’s been some rain in early February, which could benefit the mid-crop, but it must last.
As far as demand is concerned, it is true that grinding activity in importing countries has shown only anemic growth. We believe that it is bound to pick up, though. The recent selloff in bean prices to multi-year lows has made grinding even more profitable. Powder stocks have been run down to dangerously low levels, and we are therefore confident that, sooner or later, grinding activity will ignite.
Commitment of Trader figures show that speculative funds have trimmed their short positions over the past few weeks, but still hold large bearish bets. A short-covering rally – very soon on the way – will drive the market much higher, and that’s even before the market begins to grapple with what are turning into bullish fundamentals.
We believe that many traders are entrenched in the notion that the 350,000- to 500,000- tonne 2010-11 surplus will last forever. As illustrated, at this time, it seems to have been an anomaly.
Remain long, maintain stops at $2,050 per tonne, close only.