This article is brought to you by:
CONSENSUS

PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
212-776-1000

(March 13, 2000) COCOA: Cocoa futures have been relatively firm so far this month. Market support has come from several areas, including:

The Cocoa Producers Alliance, a loose grouping of 12 cocoa-producer countries accounting for roughly 85% of global cocoa output, stated last week that its members had agreed to withhold "poor quality" cocoa from the market in order to stabilize prices; some reports indicated the Alliance visualized a target price near $1,000 per tonne. (The quality levels covered by the "poor" designation are in line with criteria generally adopted by the international trade, and include beans that are moldy or slatey, as well as blended beans. It is estimated that about 10% of the Alliance's cocoa output may be characterized as poor.) According to the Alliance's secretary general, the withholding effort would pay for itself, i.e., the necessary funding would come from the higher prices the withholding plan was expected to generate. The Alliance has no central supervisory or enforcement mechanism, and compliance by individual member nations is expected to be the responsibility of governmental or private entities. While we are extremely dubious as to the plan's practicality, we recognize that talk of a producer withholding effort has tended to be supportive for cocoa futures prices, which have been in a protracted bearish move.

The international cocoa market's suspicions that over-declarations of Ivory Coast arrivals had inflated the data recently were confirmed last week, with the market focusing on revised data, based in part on New Caistab statistics. Arrivals for the week ended March 5 were estimated at 18,322 tonnes, down from the previous week's revised level of 21,788 tonnes. Taking into account revised February data, cumulative seasonal arrivals as of March 6 are estimated at 1,056,209 tonnes; this compares with year-ago cumulative arrivals of 934,698 tonnes over the same number of weeks. If, as is generally expected, Ivory Coast's summer crop comes in close to 250,000 tonnes, the country's 1999/2000 output could reach a record 1.3 million tonnes.

Ivory Coast's transitional government has released a preliminary budget for 2000 that foresees zero growth (with the likelihood of negative growth); the budget released by the former civilian government projected GDP growth of 5.5%. Low world cocoa prices were cited as a major reason for the dire outlook. The new government's apparently more objective economic expectations make it somewhat more likely that it will try to honor its agreement with international aid donors and seek to punish exporters and other participants in the cocoa market found to have acted illegally.

Ivory Coast's finance minister gave renewed assurances last week that exporters who had defaulted on contracts or were involved in improper financial activities would be brought to justice. The new transitional government has an obvious interest in pursuing this matter because future aid from such sources as the International Monetary Fund and the World Bank is contingent on holding accountable various exporters believed to have engaged in improper activities during the last several seasons.

In a sign of the times, the London International Financial Futures and Options Exchange (LIFFE) announced last week that it was terminating the traditional form of trading cocoa, and switching to electronic trading. The move will occur in the fourth quarter.

Several factors have turned the near-term price outlook a bit more promising for the bulls, including: (1) a partial discounting of the negative fundamental factors; (2) the seasonal slowdown in Ivory Coast arrivals; and (3) the producer withholding threat. Technically based selling pressure also has diminished, which is clearly helpful to the bulls. We are not abandoning our long-range negative market posture, but we would not be surprised if futures showed some near-term follow-through to the upside.

Arthur Stevenson

Back To Futures Markets Index

Hosted by:
CONSENSUS, INC. AND INVESTORS CO-OP
1737 McGee
Kansas City, MO 64108
(816) 471-3862
editor@consensus-inc.com