Cocoa market forecast after 15 October 2013

A month has passed since our last release on September 15. I will briefly reiterate the main points of the last release. Please keep in mind that as of the moment of the last release the NY price was 2570 USD.

“…the market is fundamentally posed to exceed the 2700 USD peak already in the next week. On the technical side, however, the market is overbought.

We expect the following scenario. Week 16–22/09. After a certain correction within 20-40 USD speculators will attempt to drive prices to 2700 USD or higher (1760-1800 GBP). They will not even need extra funds to do that. Since many hedgers have been actively selling at 2500 USD, when the price rises to 2650 USD, margin call will come knocking to physical traders… Thus, the situation usually snowballs, creating a sharp price movement (or “tail” in the traders’ parlance).

We expect such tail to form as early as next week. In such case the NYBOT price will easily exceed the 2700 USD level…”

We admit a certain mistake with dates, but not with the market level. The time mistake was 10-12 days. Thus, the market reached the predicted level of 2760 USD at the NY exchange and 1780 GBP in London. It was brought about by speculators taking record long positions, weak dollar in the anticipation of the US budget negotiations and the lack of sufficient precipitation in West Africa. Indeed, the precipitation level in late September-early October was less than average. However, during the last week tropical rains started streaming down on plantations in torrents as shown in the figure below.

cocoa.ee-1

Red zones designate locations with the precipitation level over 50 mm. Let me remind you that red zones are required for good harvest. Consequently, the market received a fundamental bear signal.

The same signal came from Ivory Coast ports where 48,000 tonnes of cocoa beans were delivered during the second week. Compared to 15,000 tonnes delivered during the same period last year, it gave a strong signal to sell.

However, the bulls of the cocoa market have yet to heed these two signals. They still firmly believe in the deficit and extremely low inventories.

Below the change in the number of bags at the NY exchange over the last 17 weeks is shown compared to the same period last year.

We see that warehouse inventories keep dropping. We predict that this trend will continue for another 2-3 weeks, until the new harvest will reach the warehouses.

cocoa.ee_

We expect the gap with the last year to reach 300,000-325,000 bags, giving speculators with long positions an opportunity to hold their positions a bit longer. The precipitation forecast for the second half of October also signals to the bulls to hold their positions.

The figure below shows that drought is again expected in West Africa.

Considering low precipitation in September, it signals the bulls to hold their positions.

In our opinion, bull and bear signals are now balanced and it is unclear how the situation will be developing in the next 2-3 weeks.

Therefore, our current forecast will be more cautious compared to the previous one when we were sure in the price increase.
cocoa.ee-4

So, now to the forecast. We predict a deep price correction within the next three weeks. The correction might begin this week (the least probable scenario) or at the beginning/in the middle of the next week. Before that, speculators with long positions are likely to test the 2800-2830 USD/1800-1810 GBP price corridor.

Having tested the 2800 USD and 1800 GBP levels, the market will descend to 2600 USD or 1670 GBP after a short period of consolidation.

We advise to start buying from 2625 to 2550 USD at the NY exchange and 1650 GBP or lower in London. Since we expect the strengthening of US dollar shortly, the level of 1600 GBP is unlikely to be exceeded within the next three weeks.

The amount of deliveries to the ports of Ivory Coast and Ghana will determine how long the prices will remain low.

We will be regularly providing this information and our forecasts to our partners.