Cocoa: Is this bull for real?

Cocoa prices are trading at three-year highs (see Chart 1). The market is being driven by forecasts for a 2013-14 global deficit. The speculative community is exuberant about the bullish case – open interest is near record highs, and CFTC data show a growing net- long position of 58,000 contracts. As we will illustrate, however, recent developments for both supply and demand fundamentals do not necessarily support their bullish optimism.

The main-crop in the Ivory Coast is over, and we are well into the April-through-September mid-crop harvest. There were moments this season when weather threatened to cap output at modest levels, but at this point there does not seem to be too much risk of a crop failure. After a strong early start, arrivals were running close to last year’s output. As recently as early April, arrivals were only 8% ahead of last year. Port arrivals now stand at 1.47 million tonnes, up 18% from last year at this time. At this pace, the Ivory Coast is well on its way to a record crop 


Chart 1
 

In Ghana, the world’ s second-largest producer, arrivals stand at 766,000 tonnes, up 16% from last year at this time. The spread over last year’s output has also been inching up over the past two months. Ghanaian production is also set to top early-season estimates of 820,000 tonnes, with recent forecasts at about 850,000 tonnes.

Another unexpected supply twist comes from Indonesia. Several months ago the crop was forecast at 425,000 tonnes but is now estimated to reach 500,000 tonnes.

Aside from the early-season weak supply forecasts, the underpinning of the rally – which began in January – was expectations for growing demand. First-quarter grinding data were disappointing, though. European and North American grindings, reported in mid-April, rose 0.4% and 1.03%, respectively. That is far below the roughly 3%-growth figure that has been used to arrive at the 2013-14 deficit forecasts.

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