With the improvement in West African output, however, it is doubtful that the ICCO will maintain its gloomy outlook. While demand remains strong in both the traditional markets and the budding markets in developing countries, the key driver of the most recent leg of the rally was the uncertainty over production in the Ivory Coast and Ghana.
Commodity funds have been long this market for quite some time (Chart 3), but after spiking to new highs in November, the market has stagnated. Anticipation of bearish revisions to the balance sheet could spark a broad liquidation – which may have already begun.
To be sure, the success of the 2013-14 West African crops is not a given. There are still three months remaining in the main-crop season, which is followed by the April through-September mid-crop season. At present, weather conditions look favorable, but that could turn on a dime.
In January we will get a look at fourth-quarter grinding statistics for the major processing centers in Europe and North America. For the market to maintain its overall bullish posture, these numbers will have to be as good as, or better than, expected. Without a strong demand side, the unexpected positive developments on the supply side would overwhelm the market.
We missed buying the summer lows and have been recommending establishing long positions on pullbacks. If you managed to do so, we advise liquidating long positions.