17 June 2015, the situation and the trends

As of 17 June 2015, the situation and the trends on the cocoa beans market has taken its final shape, and it is only a matter of time now as to when the market is going to take by storm the levels of 2 250 pounds or 3 350 US Dollar from the existing levels of 2 120 pounds or 3 220 US Dollars in London.

 

Our vision of the market is based on the following observations:

Firstly, the deficiency in the yield of cocoa beans in the countries of western Africa still continues, since weather conditions are far from perfect. The amount of precipitation in May, which is usually quite rainy, was dramatically less than the average this year.

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The farmers in Ghana and in the eastern part of the Republic of Côte d’Ivoire, where the amount of precipitation was two times less than  the average, were mostly affected. On the map, these areas are marked in yellow and red.

In the beginning of June, there seemed to be slight indications of the forthcoming improvement in climatic conditions in terms of the amount of tropical rainfall, but from 10 June, all of these indications were washed away by a powerful anticyclone that dominated the western part of Africa. Since this anticyclone is a part of the El Niño effect, its fast fadeaway should not be expected.

In the lower picture on the left we can see that the forecast for the next two weeks is unpromising. The light areas indicate the lack of rainfall.

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And if we have a look at South America, we will see that over there the situation is quite the opposite. Both Ecuador and the state of Bahia in Brazil are under torrential rainfall, which is not good for cocoa plantations either.

Below we can see the drawing depicting the amount of rainfall during the last 30 days in South America.

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Proceeding from the current climatic conditions and weather forecasts, we can assume that the deficiency in cocoa beans is going to be much higher than the conservative predictions of ICCO.

We would like to remind you that ICCO says that the deficiency will be 38 000 tonnes in the current season. However, in our opinion, the deficiency will be about 100 000 tonnes.

 

Reserves.

While within the last three years the average amount of reserves of cocoa beans on certified warehouses has been at the level of 5.0 million bags as of the middle of June, in the current season these carry-overs equal to 4.6 million bags. Since the harvesting season has already come to an end, there is no way for this amount of reserves to increase. The diminishing of the amount of reserves is going to provide support to the growing market.

 

Pound-dollar cross rate:

Yesterday Janet Yellen made an announcement that was much anticipated.

 

“The market players should not be worried about the time of the first rise in the interest rates. It is the subsequent rate of their rising that is much more important,” said Yellen, reassuring the audience that after the first rise the monetary policy of the Federal Reserve System will still be stimulating. Among the most serious risks for the American economy, listed by the Chair of the Federal Reserve System, were the protracted negotiations between Greece and the creditors. “If the parties fail to reach the agreement, the aggravation of economic perspectives in the eurozone and the destabilization of the European financial markets will have their effect on the USA, too.”

 

The markets have been listening very carefully, and once they realised that there will be no rise in interest rates, which means that they do not need to hold on to His Majesty’s Dollar, they have started to get rid of the green currency in massive quantities.

By the morning of 18 June, the dollar was over one per cent cheaper with respect to other currencies, and we expect that by the end of summer vacations, the ratio between a pound and a dollar will be over 1.6. Correspondingly, a cheap dollar will give rise to the desire to break out into raw materials, and in particular, into cocoa at the New York Stock Exchange.

 

Political component:

We would like to remind you that in October 2015, presidential elections will take place in the Republic of Côte d’Ivoire. In 2010, the elections ended with a small internal war, and the Republic of Côte d’Ivoire halted the export of cocoa beans for six months. In winter 2011, there was a short-term rise in prices up to 3 700 US dollars on the New York Stock Exchange.

We are not expecting a military conflict in the Republic of Côte d’Ivoire this time, but there will be a premium of 50 US dollars per tonne envisaged by speculators in case of the conflict.

 

The only unfavourable factor at the cocoa beans market at the moment are the rumours about a slight decrease in chocolate consumption.

But even taking a three per cent decrease in consumption with regard to the previous year into account , we are still going to face an estimated deficiency of about 100 000 tonnes.

 

Proceeding from the aforementioned facts, we assume that the following development of the situation is possible:

 

Hereby we would like to remind you that our forecast is just a theoretical conclusion. In practical terms, the market behaviour can make its own adjustments that are different from the current forecast.