PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
212-778-1000(March 27, 2000) COCOA: After making an intraday high of $947 per tonne, basis May, on March 16, cocoa futures reversed and were under downside pressure for most of last week. The market's negative tone reflected a drying up of the technically based buying that had triggered the earlier advance. The underlying fundamental picture provided no fresh bullish impetus to futures and, the market largely shrugged off the Ivory Coast government's announcement of what it viewed as price-support measures.
At producer/consumer talks on a new International Cocoa Agreement earlier this month, the two sides agreed to maintain the overall framework of the 1993 agreement and to work toward various mutually agreeable modifications and changes. Consumers saw the major purpose of a new agreement as the achievement of "closer cooperation with the private sector, from the farmer through to the chocolate producer" and stipulated that "providing a balance between supply and demand is an aim but that it should be achieved without recourse to direct intervention in the market." Consumers also were interested in measures that would "strengthen the credibility" of the International Cocoa Organization (ICCO), and indicated that the production-management plan, a pet project of ICCO producer members, should be substantially revised.
Producers involved in the talks were interested in a more interventionist agreement that would seek to "restore equilibrium between supply and demand by encouraging exporters to continue the production-management plan," and contain regulatory mechanisms to "cope" with price volatility. The producers indicated they were not advocating a stocks-withholding program, but saw quality controls as a means of regulating output. They appeared to provide no fresh ideas regarding their production-management plan, which was announced years ago and has never had the slightest relevance for the world cocoa market. The two sides believe that they will reach agreement on a draft document and that a new International Cocoa Agreement might be announced toward year's end.
Last week, Ivory Coast's government announced a ban exporting low-quality beans, which were defined as having a count greater than 100 beans per 100 grams; other quality criteria were in line with regulations published last year. The export ban, to go into force April 1, would affect the mid-crop, which this year is expected to be in the range of 220,000-250,000 tonnes and which usually has a very high proportion (about 75%) of beans above the newly designated cut-off point. While not offering any detailed explanations, government officials insisted the action was in harmony with producer commitments made at the producer/consumer talks, and would help stabilize world cocoa prices.
The most telling aspect of the government's plan is that it did not call for destruction of the beans banned from export. The market is right to assume that farmers may simply withhold some of their poor-quality summer-crop beans, and seek to mingle them with better-quality 2000/01 main-crop cocoa. Also, Ivory Coast's domestic bean-processing capacity is now thought to be around 250,000 tonnes, so the poor-quality beans probably will be processed and exported in the form of semi-finished cocoa products. The basic conclusion must be that the government's action makes no meaningful difference to Ivory Coast's statistical cocoa profile.
Bahia cocoa arrivals for the week ended March 19 were reported at 8,085 bags; arrivals for the corresponding week a year ago were 7,248 bags. Cumulative seasonal arrivals now stand at 1.54 million bags versus the year-earlier level of 2.20 million. With the inclusion of non-Bahia cocoa (including cocoa produced in other Brazilian states and cocoa imported into Brazil), cumulative seasonal arrivals are 3.10 million bags for 1999/2000 versus 2.71 million bags in 1998/99.
The U.S. Commerce Department has reported January cocoa bean imports into the United States at 72.15 million kilograms, up 4.4% from the year-ago level and the highest monthly figure in ten years. Imports of the major cocoa products, with year-earlier levels in parentheses, were reported as follows (million kilograms): cocoa butter, 8.74 (4.27); non-defatted and defatted cocoa paste, 3.2 (2.76); and unsweetened cocoa powder, 6.07 (6.98).
Last week's price action left a gap at $893-$891 on the May chart, and this forms nearby resistance. We continue to view the underlying fundamentals as negative, and would need to see May futures trade through the $950 level to become more enthusiastic about the market's near-term upside potential.
Arthur Stevenson
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