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March cocoa continues to build on this month’s sharp rally, with prices rising more than 22% during the past three weeks. In addition to ongoing concern with this season’s cocoa crop in the Ivory Coast, a report that Indonesian cocoa production may decline 10% to 15% from last season’s already below-average levels provided further support for the market as that nation has been a traditional supplier to the US market. Many analysts are forecasting double-digit declines for cocoa production in the Ivory Coast and Ghana this season, due in large part to excessive dry weather over the past few months. The improvement in broad-market sentiment has also helped to underpin cocoa prices at these high levels, although any sort of Euro zone risk flare-up or weak US economic data could erode this support in a hurry. In addition, concerns over global demand have been elevated due to sluggish fourth quarter cocoa grinding data from Europe and North America.

TODAY’S GUIDANCE: With prices rising over $200 during the past four sessions, end-of-week profit-taking could dampen upside momentum later on in the session. The upcoming Commitment of Traders data will reflect any substantial reduction of the non-Commercial net short position during this week’s rally, as fund short-covering has been a major component of this year’s huge rally.

TODAY’S MARKET IDEAS: While this week’s upside breakout to fresh two-month highs should have plenty of technically-based support, prices could be vulnerable to a sharp pullback if outside markets fail to maintain their positive tone.

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The cocoa market was finally able to post a positive result yesterday, although there is more than $300 worth of losses to recover from the past two weeks of trading. March cocoa went through a choppy and volatile trading session on Tuesday but was able to make a sizable recovery after posting a new multi-year low. Support from outside markets proved to be a key factor, as the market was able to post a daily gain for the first time since November 7th. While heavy near-term supplies continue to pressure the market, reports of dry weather over Ivory Coast production areas may have triggered the rebound. In addition, short-covering in front of the Thanksgiving holiday may have helped to lift prices further away from the early lows. Cocoa port arrivals in the Ivory Coast have been running well behind last season’s pace but a producer stockpiling program has not been effective in lifting prices out of their recent slide. Other major West African cocoa producing nations such as Ghana and Cameroon are projected to have their second record high cocoa crops in a row.

TODAY’S GUIDANCE: March cocoa is back under pressure this morning, although prices were able to avoid extending the recent selloff down to new low ground. If cocoa’s fundamentals remain negative and outside markets continue to be sluggish, prices are likely to go into tomorrow’s holiday down near multi-year low levels.

TODAY’S MARKET IDEAS: March cocoa close-in resistance is at 2440, with 2380 and then 2355 as the next downside objectives. Given the steep drop in prices since early November, traders should wait for a more extensive bounce before entering the short side of the market.

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The cocoa market finally showed some resiliency during the past few sessions, although not enough for prices to rise above the recent trading range. December cocoa was able to recover from early pressure yesterday and finish the session with moderate gains. It has been able to close higher in three out of four sessions this week after only having three positive sessions over the previous three weeks. Still, cocoa has lost more that $400 during the month of September. Positive developments on both sides of the Atlantic were able to lift macroeconomic sentiment and trigger a broad-based recovery in cocoa as well as other commodity markets yesterday. The British Pound’s failure to follow through on early strength may have limited gains in cocoa, as that diminished arbitrage buying of ICE futures against the LIFFE contract. Heavy near term cocoa supplies, due in large part to all-time record crops from top cocoa producers Ivory Coast and Ghana, have helped to keep prices grounded near their lowest levels of the year. While next season’s global cocoa production will roughly balance supply and demand, many traders feel that this season’s global cocoa surplus of more than 400,000 tonnes will have to be digested by the market before prices can lift substantially away from their current low levels.

TODAY’S GUIDANCE: Consolidation is normally a continuation pattern and the market could resume the downtrend at any time. The sideways action is helping to alleviate the oversold condition but we can not rule out a further bounce to resistance at the 2,749-2,782 zone basis December cocoa before a resumption of the downtrend.

TODAY’S MARKET IDEAS: Keep 2,562 as the next target.

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The cocoa market made a decisive move away from the recent highs yesterday, although outside market factors appeared to be the main catalyst for this slide in prices. December cocoa plunged far below the recent trading range, ending the session with heavy losses and with its lowest closing price since mid-August. Broad-based pressure on commodity markets due to an erosion of global economic sentiment may have been the primary cause for cocoa’s extensive weakness. In addition, a massive selloff in the British Pound down to 11/2 month lows was seen as a major negative factor for cocoa, as that encouraged arbitrage selling of ICE cocoa against the LIFFE contract. Rainfall over Ivory Coast production areas that broke a recent dry spell and will likely benefit the upcoming cocoa crop also had a negative impact on prices. With only a few weeks left before this season’s crop year ends, cocoa port arrivals in the Ivory Coast remain more than 23% above last season’s levels. A director for a major European chocolate producer forecast that cocoa supplies would to stay plentiful through the end of this year.

TODAY’S GUIDANCE: While December cocoa made a mild rebound from early lows overnight, prices remain close to the lower end of this week’s severe pullback. Broad-based sentiment for commodities may be improving, but heavy near-term supplies may be difficult to overcome.

TODAY’S MARKET IDEAS: Tuesday’s swift turnaround may be more reflective of cocoa’s near-term fundamentals, but traders looking to enter the short side are still advised to look at out-of-the-money December puts until a downtrend can be sustained over several sessions.

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The cocoa market has made a mild rebound from new lows for the move, but it will need support from outside markets to offset weak fundamentals. December cocoa was able to recover from posting a new 8-month low early yesterday and finished the session with moderate gains. However, prices remain below the trading range from earlier in the week. A recovery in the British Pound helped to improve sentiment for the cocoa market by encouraging arbitrage buying of ICE
cocoa against the LIFFE contract. A broad-based improvement in commodity sentiment as global equity markets made a recovery lent support later in the session. There were reports that cash cocoa prices in the Ivory Coast rose last week, due in large part to buyers stockpiling in front of the holiday season. In a news interview, the executive director of the International Cocoa Organization said that the 2010/11 season’s global cocoa surplus would be 325,000 tonnes, an increase of more 100,000 tonnes from their previous estimate last month. A large portion of that increase came from projections of record cocoa crops this season for the Ivory Coast and Ghana.

TODAY’S GUIDANCE: December cocoa has been able to extend yesterday’s rebound, due in large part to a stronger British Pound this morning. A key factor will come when the market retests the 2915 level later on today, an area which provided support for the market during the late spring and summer.

TODAY’S MARKET IDEAS: The market saw a higher close after a making new low yesterday, and this may attract some technical buying short-term, with 29020 and 2943 as resistance.

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In our last issue we predicted a further slowing of the US economy before a transition to a better 2nd half of 2011. However, the stalled US debt ceiling debate that was eventually pushed out to the brink of the August 2nd deadline has probably left US consumer and investor sentiment injured for most of August. Given the ongoing political divide, it is even possible that sentiment will continue to be affected well into September. In looking back at a chart of US Consumer Confidence, it is clear that it was dramatically undermined by the Japanese natural disaster. While we don’t think the US debt crisis created as much raw fear and anxiety, we do think it added to the softening of the US economy. We might also suggest that the divided political arena in the US could ultimately cause US consumer confidence fall more than it did from the Japanese earthquake.

In looking at the historic rally in gold, it is clear that the most recent wave of anxiety was indeed very significant. This is another indicator of the collateral damage done to the US economy. Furthermore, with independent and foreign-based entities advising the US of the need to reduce US spending by $4 trillion and the initial effort from Washington failing to meet even half of that goal, the ability to protect the US from a something similar to the sub-prime crisis has been dramatically reduced. In fact, with both sides of the political battle in the US upset with the debt ceiling extension plan and the anti-spenders promising to battle even more aggressively in the future, it is clear that a major portion of the US populace, government and media have yet to grasp the reality that US government spending is going to come down.

With US economic numbers softening, the US Fed thought to be on hold and the US government “probably” limited in its ability to offer stimulus programs through the end of the year, it could be very difficult to throw off a generally bearish macroeconomic track for the weeks ahead. Expectations of slack US data points have recently had little impact on members of the Fed, with some members steadfastly holding against additional quantitative easing efforts. Certainly the US economy could somehow gather itself and temper macroeconomic fears, but we think that is unlikely until the negative environment of July and early August works through the closely watched US numbers. About the only thing that could alter our negative 3-4 week economic outlook would be a surprise “grand deal” from the super committee, if it were to find the necessary spending cuts from programs that don’t have broad political support.

Therefore we expect to see weakness prevail in US equities, energy prices, sugar, platinum, copper, cocoa and other physical commodity markets that lack the internal fundamental fortitude necessary to stand up against a quasi-deflationary environment ahead. Some markets like corn and hogs appear to have the fundamentals to stand up to some outside market pressure, but it is also possible that weakness in the US Dollar will provide some underpin for physical commodities in the weeks ahead. While Euro zone debt fears have seemingly become entrenched, the capacity to cushion the dollar against its own problems is limited. Therefore, it is possible that further economic weakness in the US economy and the still unresolved nature of the US debt battle will likely leave the dollar in a downward track. Some traders even suggest that interest rate differentials between the US and the euro zone are such that the dollar will remain under pressure from that angle, and that in turn could serve to support certain physical commodity markets.

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The cocoa market has held onto recent gains, but the prospect of large near-term supplies out of West Africa may be holding any further strength in check. Yesterday, September cocoa went through another session without finding much direction, ending the day with a minor gain but near the middle of the day’s range. Risk concerns from debt problems in the Euro zone and the US may also be weighing on cocoa prices. Projections for smaller global cocoa production next season may be providing some longer-term support for the market. A moderate rally in the British Pound provided support yesterday by encouraging
arbitrage buying of ICE cocoa against the LIFFE contract. A report that cocoa exports from the Indonesian island of Sulawesi during the first half of 2011 fell more than 40% from last year’s levels was also seen as a positive factor for the market. Officials in Ghana are now projecting this season’s cocoa production to exceed 1 million tonnes. This figure is well beyond the previous record crop and would indicate that the world’s top two producers had all-time high production this season.

TODAY’S GUIDANCE: September cocoa has been unable to lift outside of the recent trading range, as negative fundamentals have been balanced against supportive factors from outside markets. Large supplies from the Ivory Coast and Ghana may pressure the market towards a downside breakout in the near future.

TODAY’S MARKET IDEAS: September cocoa may find support around the 3135 area during today’s session, with further support around 3105. Resistance may come in around 3185.

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The cocoa market has climbed back towards the upper levels of the recent trading range, but may need to receive further supportive news before making any attempt at an upside breakout from this area. September cocoa was able to recover from early pressure, and ended up posting sizable gains during Monday’s session. News of heavy rains over Ivory Coast production areas was thought to be a key supportive factor for the market, due to the increased chances for crop disease as well as damage done to roads in production areas. A rebound in the British Pound also provided support for cocoa prices later on in the session. Ivory Coast cocoa port arrivals this season remain over 15% above last season’s levels at this time of the year, which may have dampened some of the cocoa market’s strength during the session. In addition, Ghana has forecast this season’s cocoa crop to be well above previous record high levels. The only major global cocoa producer expected to have a production decline this season is Indonesia, while most West Africa producing nations are expected to have large increases with their current crops. Brazilian cocoa grindings during May were up almost 6% above last year’s levels.

TODAY’S GUIDANCE: Although the cocoa market has put together another rebound from the lows, prices have not shown much inclination to follow-through to the upside once they reach the upper levels of the last month’s trading range. Supportive fundamental news may be needed to change what is currently a bearish supply/demand outlook for the market.

TODAY’S MARKET IDEAS: The initial short-term downside target is at 2796 for September cocoa with first support near the 2880 level. Resistance will now come in around the 3035 to 3050 level during today’s session.

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The cocoa market’s descent yesterday was not as severe as late last week, but prices continued to press towards new lows for 2011. July cocoa remained well within an extended selloff but avoided making a fresh 6-month low, as prices finished the session with only moderate losses on the day. While political events in the Ivory Coast have recently been quiet, port arrivals for that nation at the end of May were still running over 15% above last season’s totals for this time of the year. In addition, constructive weather for Ivory Coast growing areas is expected to boost production of this season’s mid-crop. A record cocoa crop for Ghana this season also has recently weighed on prices during the past few weeks. A reversal in the British Pound added to pressure on cocoa, as that encouraged arbitrage selling against the LIFFE cocoa contract. While Indonesia is still projecting a small crop this season, most of the other major global cocoa producers are looking forward to large supplies this season. Weakening economies throughout North America and Europe may cut into chocolate demand over the rest of this year.

TODAY’S GUIDANCE: A strong performance by the British Pound has helped to lift July cocoa above the 2900 level, but an overly bearish supply/demand outlook may limit any upside potential during the next few sessions. Unless there are some positive developments for the market to digest, July cocoa is still more likely to post a fresh new low that to hold onto any sort of sustained recovery from these low price levels.

TODAY’S MARKET IDEAS: 2850 remains a near-term downside target for July cocoa.

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The cocoa market could not hold off pressure from upcoming Ivory Coast supplies, and made another to the downside yesterday. The July contract fell though the recent lows to its lowest levels since early April. The market bounced overnight off of the weaker dollar, but it has since given back a good portion of the gains. The resumption of cocoa exports from the Ivory Coast continues to pressure the market, with expectations that as much as 150,000 tonnes of cocoa could be loaded onto ships by the end of next month. With estimates that less than 10% of cocoa stored at port facilities spoiled during the recent political crisis, the amount of cocoa leaving the Ivory Coast may only be limited by the numbers of ships arriving at the ports of Abidjan and San Pedro. The announcement that a major global food conglomerate resumed their Ivory Coast operations also was seen as weakening prices, as this will expedite the processing of cocoa for the global market. This season’s official cocoa purchases in Ghana are still running well over 50% above last season’s levels.

TODAY’S GUIDANCE: July cocoa was unable to follow-through on a modest rebound above the 3000 level early in the overnight session, which may indicate that there is further to go before this month’s selloff loses its downward momentum. Additional news of ships loading cocoa at Ivory Coast ports could have the market retest the early April lows.

TODAY’S MARKET IDEAS: The cocoa market appears to be heading lower this morning. Any sustained weakness during the session could have prices continue to fall.

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