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Mailed directly to you. |
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(August 11, 1997) COCOA: Cocoa futures continue to erode, pressured by speculative long liquidation. Reports that cocoa-growing areas in Ivory Coast had received beneficial rainfall were viewed as negative as the precipitation improves that country's 1997/98 production outlook. Currency differentials, which tended to prompt arbitrage selling in New York against purchases in London, were another negative factor.
The El Nino phenomenon is now well underway, and could potentially have an adverse effect on cocoa production in several parts of the world. Clearly, however, the market's price behavior is suggesting that crop damage is so far only a theoretical possibility, not an imminent threat from which traders need to protect themselves. A case in point is Indonesia, where El Nino-related dry conditions could cause a significant production drop; for the time being, local traders still are looking for the country's main crop to come in around 200,000 tonnes, up from the previous year's main crop of about 180,000 tonnes.
Brazilian cocoa bean processors reportedly have an overall capacity of about 250,000 tonnes, but the country's cocoa production is in a long-range slump and is estimated at about 160,000 tonnes in 1996/97. To keep domestic factories operating normally, imports have been authorized by the government. Last week, a vessel holding 8,000 tonnes of cocoa reportedly berthed at Ilheus, Brazil's principal cocoa port. So far, only Indonesian cocoa beans have been permitted into Brazil. However, there were reports that Brazilian agriculture officials would soon visit Ivory Coast in order to determine whether imports from that country posed any disease threat to Brazil's cocoa trees. (All imports are on a drawback basis, meaning that the processed products are subsequently exported.)
The end-July inventory of cocoa stocks in warehouses in Belgium, Holland, Germany and the United Kingdom showed supplies of 827,683 tonnes, down from the end-June level of 854,443 tonnes. Although stocks in Western Europe have declined for the last few months, they are barely changed from the February level of 879,944 tonnes.
Cocoa remains in a downtrend. New, bullish fundamental developments (such as a genuine production scare) are needed to launch a sustainable price rally. We continue to stand aside. Although we still look for a long-range price advance, we believe the market has to “prove itself” before it can generate any near-term upside enthusiasm. September faces chart resistance at about $11,560 per tonne, and then $1,610.
Arthur Stevenson
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