wmeubank@ocp.kcmo.com
COCOA
195 Route 6A, Suite 6, Orleans, Massachusetts
(July 2, 1997) COCOA: El Nino has been singled out as being responsible for droughts in the Southern Hemisphere. One of the problems with the recent rally in cocoa is that the Ivory Coast has been getting rainfall. It is very difficult to have a drought and rain at the same time. Arguably cocoa has more than outpaced any problems that may occur, but the funds are busy looking for the next coffee. If demand does not slacken as a result of the price rise, cocoa could have still more upside in its future. For the near term, I suspect we're moving into a time frame in which either side might make money, but this is not a market for everyone. Caution is advised. The chart is becoming a bit negative right now.
RECOMMENDATION–Most traders should trade this via options. September cocoa has support near 1670, 1640-1650, 1600, 1575-1580 and near 1530. Resistance may appear near 1730-1750, and in the low 1800's. Aggressive traders might sell a rally to the upper 1600's, lower 1700's with stops over the 1737 high, and/or buy a 50-point dip with stops of 50 points or so, or consider buying the 1600-1625 level. Traders should take profits on tests of support/resistance. However, most traders should stay on the sidelines until the dust has settled. Option traders could buy calls on dips.
M. Steven Morgan
One New York Plaza, New York, New York
(June 30, 1997) COCOA: After making new contract highs early last week, cocoa futures came under downside pressure. The weaker tone was due to profit-taking against the earlier advance, renewed origin selling and selling by speculators trying to “pick” a top. Some of the weakness also may have reflected general discounting (for the moment) of the market's recent bullish fundamentals.
No fresh information has emerged with respect to the 1997/98 crop outlook in various parts of the world. While it still appears that Ivory Coast's new crop will fall below the year-ago production level, it should be emphasized that cocoa harvesting in that country does not get underway for another three months, thus leaving lots of time for growing conditions (and market perceptions) to change. Similarly, while the El Nino is expected to bring dry conditions to Southeast Asia (which could hurt cocoa production in Malaysia and Indonesia), its likely impact is several months away and it is obviously premature to expect severe, or even substantial, crop damage in those countries. No doubt these “on again, off again” perceptions will be with us throughout the summer, and will play a significant role in price fluctuations.
The cocoa business consolidated further with the announcement that Archer Daniels Midland had agreed with E.D. & F. Man to purchase its cocoa-processing plants. The six facilities–located in the United States, Canada, the United Kingdom, Poland and Brazil–have an estimated annual processing capacity of 160,000 tonnes. The acquisitions raise ADM's overall cocoa processing capacity to about 410.000 tonnes, making the firm the world's largest cocoa processor.
Another leading processing firm, Barry Callebaut, recently announced that it was opening a chocolate college in Poland to support various aspects of cocoa research and help boost consumption in Eastern Europe. The firm, which conducts cocoa-related research in several countries, is also planning to consolidate some of these efforts and probably will establish another institution that could become a world leader in research and as a source of cocoa-related information. The firm also announced it was opening a manufacturing plant in Singapore, its first in Asia, which would serve its growing customer base in Southeast Asia and Australia.
We continue to look for higher values longer range. Near term, we look for a corrective pullback, and expect to see September futures trade down to the $1,600-per- tonne level.
Arthur Stevenson
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