Franc view: The combination of tighter supply, rising demand and positive short-term technicals (the RSI appears deeply oversold) suggest cocoa prices will not return to the doldrums of 2017.
Cocoa’s glittering rise, from $1,809/tonne on December 22, 2017 to a high of $2,914/tonne on May 1, 2018 (NY futures), was reminiscent of the Bull Run of H2-2013–the lead-up to a cocoa supercycle that lasted three years. The gain of over 61% (281% annualised) was primarily on concerns of a potential shortfall in output in the 2017/18 season, with estimates for a deficit of up to 200,000 tonnes. And with speculators having been short in the wake of a large surplus in 2016/17, the risk for a sharp price correction in the event of production jitters was to the upside.
The rally in the New York market also reflected concerns over the quality of beans delivered to the London exchange, with the London market awash with low quality beans from Cameroon which market participants were reluctant to take—traders were apparently worried that certificates for Cameroon beans that were close to expiring would not be renewed. A situation which created an arbitrage opportunity for other West African supplies—Ghana and Côte d’Ivoire to be delivered to New York. However, the rally seems to have come to a screeching halt with prices dropping 21% since May 1 to $2,289/tonne as concerns over the weather and output fade.
The fairy godmother—Growing demand
However, the downside in prices might be limited with the International Cocoa Organization forecasting a tightly balanced market this season and agribusiness giant Olam—which is itself boosting its global grind capacity—also optimistic on demand even from producers like Indonesia and Brazil. Indonesia, the third largest cocoa grower is now a net importer because of the expansion in domestic processing. Similarly, firm demand is emanating from Brazil, traditionally the 7th largest producer—where increasing processing capacity has prompted the country to reopen its market to beans from Côte d’Ivoire. Around 60,000 tonnes are likely to be imported from both Côte d’Ivoire and Ghana to avoid interrupting their grinding season, according to Brazilian cocoa grinders.