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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(September 29, 1997) COCOA: Cocoa futures prices pushed through $1,700 per tonne, basis December, for the first time in almost three weeks, reflecting renewed concern regarding the 1997/98 production outlook in various parts of the world. Most constructive were reports that Ivory Coast rainfall was well below year-ago levels, raising the possibility that the global 1997/98 supply/use deficit could exceed earlier expectations. (Reports of Ivory Coast rainfall had previously induced price weakness.)
In its September 25 market report, the London-based trade firm E.D. & F. Man pegged the global 1996/97 deficit at about 145,000 tonnes, little changed from the firm's May forecast of a 134,000-tonne deficit. Of course, the 1996/97 global statistics have long been discounted, and trader attention is fixed firmly on the 1997/98 statistical outlook. Man's report gave no formal 1997/98 forecasts, but stated that the ongoing production problems in Brazil, Ecuador and Papua New Guinea could lead to a 1997/98 stocks drawdown of 150,000-200,000 tonnes.
Man's report also noted that the ongoing El Nino could hurt production in various parts of the world, which could raise the supply/use deficit to more than 400,000 tonnes. Because there is no strong statistical relationship between Ivory Coast production and El Nino-induced weather problems (in contrast to the more reliable correlation for some other cocoa origins), weather conditions in the Ivory Coast are likely to remain the market's major fundamental focus of attention over the next two to three months.
In our September 12 quarterly outlook report, we projected a global 1997/98 stocks drawdown of 250,000-300,000 tonnes, while emphasizing that exceptionally grave El Nino-related crop damage could cause global stocks to fall by about 500,000 tonnes: we characterized such a scenario as “explosively bullish for futures prices.” Because Man's statistical outlook is essentially the same as ours, the firm's report did not surprise us, and we will now await with interest the firm's next report, which probably will include “official” 1997/98 production forecasts.
We are maintaining our long-term bullish price view, based on our global 1997/98 fundamental outlook.
Arthur Stevenson
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