Has the cocoa bull had it after crop surprise?

Ivorian port cocoa (NYBOT:CCH14) arrivals have been very strong. Since the main crop harvest began in October, 868,000 tonnes of cocoa beans have been delivered. That compares with just over 600,000 tonnes at this juncture of the marketing year over the past few seasons. The market has been rallying since this past summer, largely over weather concerns. But the weather has turned out to be better than expected. The challenge for the balance of the main-crop harvest, which extends through March, is the Harmattin winds, which can dry the soil, depriving crops of much-needed moisture. The winds have been mild over the past few weeks, however, and the market has responded with a sharp selloff (Chart 1).

The world’s second-largest producer, neighboring Ghana, is experiencing a similar situation. Early forecasts called for a 2013-14 crop of 780,000 tonnes, down from 835,000 tonnes in 2012-13 and 880,000 tonnes in 2011-12, but results have been much better than anticipated. Arrivals stand at 486,000 tonnes, up from 347,000 tonnes last year at this time.

On the demand side, butter ratios have remained strong. The ratio spiked to 3.0 times the price of London spot beans earlier this year, after sinking to as low as 1.0 in mid-2012. The ratio is still holding well, at about 2.5. Powder prices have perked up off their lows, but remain weak and continue to be a drag on the combined butter/powder ratio (Chart 2).

In early December, the International Cocoa Organization (ICCO) revised its estimate for the 2012-13 global balance sheet to show a deficit of 160,000 tonnes, up from its previous forecast for a deficit of 52,000 tonnes, adding fuel to the rally. It also has been predicting that we are looking at deficits for the next several years.

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