wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 13, 1997) COCOA: Cocoa futures advanced last week, with December pushing through the $1,700-per- tonne level to the market's highest point since late August. We were not aware of any fresh bullish developments, and attribute the price strength to the general market view that the 1997/98 season potentially will see a significant decline in global cocoa stocks. Also helping the upside movement were currency considerations, which stimulated arbitrage buying of New York futures against sales on the London market.
A warehouse fire in Amsterdam (Holland) reportedly destroyed about 15,000 tonnes of cocoa, including 2,000 tonnes of the International Cocoa Organization's buffer stock. Because global cocoa stocks are thought to be more than 1 million tonnes, the warehouse loss was clearly statistically insignificant. It seems likely, however, that the fire provided some psychological support for cocoa futures and contributed to the market's strength during the early part of last week.
Holland's third-quarter grindings figure was reported at 101,817 tonnes, 2.3% above the year-ago figure. The modest increase was in line with general trade expectations, and had no market impact. Trade sources suggested that one reason grindings had shown only modest growth was that competitive pressures had kept a lid on retail prices during a period of rising cocoa values.
El Nino-related weather concerns in some parts of the world continue to strengthen the cash/futures differential. For instance, as of October 6, Sulawesi beans commanded a premium of $38 per tonne versus nearby futures; the average premium has steadily increased over the last three months, starting at $22 for July, rising to $28 in August and reaching $35 in September. The average premium for September was the highest monthly figure for the six-year period. Some traders also believe cocoa is being withheld at source, given expectations of further depreciation of Indonesia's currency (rupiah).
A parallel example is evident in cocoa beans from Ecuador. As of October 6, Superior Seasons Arriba beans were trading $107 above New York futures. This compares with average premiums of $104 in September, $88 in August and $78 in July.
West Africa's 1997/98 production remains the dominant fundamental question mark for the cocoa market. We have no new information or insights regarding this topic, and anticipate that near- to intermediate-term price action will reflect weather reports for the region and their effect in shaping traders' crop expectations.
On October 22, the European Parliament will vote on how chocolate products produced in member countries are to be labeled. The issue has arisen because some countries allow the use of non-cocoa fats in their chocolate while others do not. A Belgian proposal that the labels should include the phrase “chocolate with extra vegetable fat” was rejected by the EU's Environmental Committee on October 8; the committee supported a British proposal that labels simply show the ingredient breakdown.
In our commentary of October 6 we stated that “an advance by December futures through the $1,710 area would make us more enthusiastic about the market's near-term upside potential.” Such an advance occurred last week, and we now view the $1,760 level, basis December, as our next upside target.
Arthur Stevenson
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