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PRUDENTIAL SECURITIES, INC.
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(November 10, 1997) COCOA: After moving lower for most of October, cocoa futures assumed a steadier tone last week but remained well below the highs of several weeks ago. Currency-based arbitrage buying and speculators trying to find a price bottom were behind the support. Additionally, some technical traders found a buy signal in last week's price action that closed the August 21 chart gap at $1,570-$1,585 per tonne.
Ivory Coast arrivals (cocoa transferred from interior growing regions to coastal export points) continue to trail the year-ago pace, but this is not surprising given the general market view that the season might start slowly. One reason for the delay has been the government's failure to set the “bareme,” an overall price series consisting of several components, such as warehouse costs and f.o.b. prices. Another reason for the slowed pace may be bureaucratic confusion with the approach of the 1999/2000 season, the first in which Ivory Coast's government is expected to heed the urging of its international aid donors and dissolve its cocoa- exporting monopoly powers,
Although September was a relatively dry month in the Ivory Coast, rainfall levels returned to seasonal norms in October, raising production prospects for 1997/98. In its recent report, the USDA forecast the country's 1997/98 crop at 1.18 million tonnes versus the year-ago figure of 1.13 million, a scenario that has acted as a negative market factor recently.
Somewhat more surprising than the Ivory Coast forecast was the USDA's projection of Indonesian 1997/98 output at 325,000 tonnes, up from the previous season's production of 322,000 tonnes. Many market watchers had expected a significant production decline due to the protracted El Nino-related dry conditions in Indonesia. Because the El Nino is expected to persist until sometime from March through May next year, there is lots of time for the market to reevaluate the weather impact on output; it may be that forthcoming production estimates for this origin will be below the USDA's initial forecast.
Table 1 shows Brazil's long-range cocoa production trend for both the Brazilian crop year (May-April) and the international cocoa year (October-September). The 1.8-million- bag forecast for the 1997/98 Brazilian year (published in E. D. & F. Man's latest market report) is about 40% below the year-ago level and is simply the latest phase in the country's long-range production decline. However, the decline may be stalling: In its October survey, the USDA forecast Brazil's output in the 1997/98 international year at 152,000 tonnes, up from the year-ago level of 145,000.
TemporaoMain Annual Harvest Harvest Harvest Brazil Int'l Season(May-Sep) Oct- Apr Year1 Year2 1984/85 1,786 3,244 5,030 6,370 1985/86 3,236 2,901 6,027 5,674 1986/87 2,774 3,849 6,623 5,395 1987/88 1,546 3,448 4,994 5,933 1988/89 2,485 2,758 5,243 4,986 1989/90 2,228 2,768 5,243 4,986 1990/91 2,296 3,643 5,939 5,659 1991/92 2,016 2,214 4,230 4,208 1992/93 1,994 2,106 4,100 4,475 1993/94 2,455 2,458 4,913 4,184 1994/95 1,726 2,183 3,908 3,215 1995/96 1,022 1,648 2,670 3,335 1996/97 (3) 1,691 1,203 2,895 2,100 1997/98 (4) 1,000 800 1,800
1May-April; 2October-September; 3Estimated; 4Forecast.
Source–Bahia Cocoa Trade Commission
We are maintaining our constructive long-range price view, Near term, we'd want to see March futures trade through the $1,700 level to be more confident of the market's upside potential.
Arthur Stevenson
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