Butter stocks have dwindled, which has shown up in skyrocketing butter prices. The butter-to-beans ratio has spiked to 2.9 times the price of spot London beans. As seen in Chart 2, the ratio had fallen to1 in mid-2012. Powder prices have fallen, keeping the combined butter/powder ratio at bay (Chart 3), but butter drives the market.
On Oct. 7 the International Cocoa Organization (ICCO) revised its balance sheet for the recently concluded 2012-13 marketing year to reflect these developments. The estimate for the global production/consumption deficit jumped to 86,000 tonnes, a larger shortfall than its previous estimate for a deficit of 52,000 tonnes. It cited sluggish output and the fresh demand coming out of a growing Asian middle class.
The ICCO also forecast that the global balance sheet would remain in deficit over the next four years. This outlook may be a bit hasty, but based on current trends, ongoing deficits will persist.
If you did not follow our (exact) recommendation and were astute and aggressive enough to establish a long position, remain long and place sell stops at $2,500 per tonne, basis the nearest contract, close only. If you are sidelined, we continue to recommend discipline and close monitoring for the inevitable setback – shallow as it may be – to get long this market. We believe the market is poised for a return to the 2011 highs that reached beyond $3,700 per tonne.