Price forecast for September 2013

We published our last forecast of developments regarding the forthcoming 2013/2014 harvest of cocoa beans less than three weeks ago. The opening price at NYBOT (New York Board of Trade) on 28/08/2013 was around 2460 USD/tonne and at LIFFE –1630 GBP/tonne. We made the following forecast on 28/08/2013: Therefore, I predict the following price scenario:

August: a small increase within 20-30 USD.

The first part of September: a sharp increase by 150-200 USD (the news will be focused on lack of rain, déjà vu of 2009, speculators taking long positions, etc.) It is possible that the sharp increase will start in late August. In this case, it will be followed by correction in early September. The downward correction will be (approximately) equal to half of the increase from today’s levels.

The actual price dynamics was very close to the forecast: From 28/08 to 03/09 prices stayed within +/- 45 USD/tonne of 2460 USD and started to grow rapidly in early September. Currently the NYBOT price has already reached 2605 USD with an increase of more than 150 USD, thus confirming a certain predictability of speculators’ actions. 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. They will be forced to buy physical goods from farmers, simultaneously covering their current losses at commodity exchanges. Therefore, they may be just short on actual money. In this case banks and brokers will force closure of their positions. 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 expect a correction in the last week of September, but the price will not drop below 2525-2550 USD (about 1650 GBP or possibly higher.) Another scenario is also possible with no dramatic movements and the price curve flattening out by the end of the next week. Then the prices would shoot up in the last week of September (23–29/09). Technically, the market is already overbought, but the last data indicate that short sellers are withdrawing from the cocoa market and physical hedgers are increasing their positions. On the other side, the increase in positions is financed by large speculative accounts. If such accounts are used in the market, they are usually settled at the volatility level of 250 USD or higher. Since the market has currently increased only by 190 USD month-to-date and no large sale orders have been noticed, we consider the third option – the price going down starting next week – as unlikely.

It is too early to predict the price fluctuations in October. In theory, a drop to 2400 USD or lower is possible. However, much will depend on weather. As the image of ocean temperatures shows, the temperature in the Gulf of Guinea has been abnormally low. Until the summer sun has heated up the ocean in the Southern Hemisphere and the cold Benguela Current has ceased cooling the Gulf waters, precipitation levels are bound to stay more or less the same.

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Fig. 1.

The world ocean with abnormally hot (yellow) and cold (green) areas.

Note: Due to the Benguela Current, some of the driest deserts in the world have emerged in Africa: the Namib Desert and the Kalahari Desert.

Long positions are also strengthened by abnormally strong western winds in the equatorial region that push a huge anticyclone from South America towards West Africa.

Fig. 2. Areas of high (brown) and low (green) atmospheric pressure.

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The area with an abnormally high pressure is highlighted in brown. Meteorologists do not expect any rain in West Africa in the next 10-15 days. Certainly, physical traders are also concerned about rapidly dropping cocoa inventories at warehouses serving the NY exchange.

Fig. 3. Change in cocoa inventories at the NY exchange compared to the same period in 2012.

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The y-axis shows the number of cocoa beans bags at the NY exchange compared to the same period in the 2012/2013 season. The x-axis shows the last 13 weeks.

We see that during summer 2013 the commodity inflow and inventories at the exchange remained stable and equal to the last season, but during the last 5 weeks the situation changed radically. The cocoa beans inventories at the warehouses of the NY exchange have been dropping rapidly and we expect a deficit in the amount of 250,000-270,000 bags by the end of the season. This is an estimated deficit compared to the similar period last year.

However, the human psychology is such that when we hear the word “deficit”, we start buying. Since low precipitation will also impact the 2013/2014 harvest, it is quite possible that the October correction will not be deep enough.