The Hightower Report

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The cocoa market has risen far above the recent trading range, as Ivory
Coast uncertainty has driven it sharply higher. July cocoa had a strong gain for the third session in a row on Friday and reached its highest price level since March 14th. Further delays with the resumption of exports from the Ivory Coast have provided support for the market, even with indications that over 475,000 tonnes are at Ivory Coast port facilities ready for shipment. Firms in Europe are estimating that supplies will need two weeks to travel from West Africa to their ports. There are reports that rain in West African production areas may delay the harvest over the next few days. A strong rally in the British Pound also provided some support for cocoa prices, even with the LIFFE exchange closed for the royal wedding. The Commitments of Traders reports as of April 26th showed non-commercial traders were net long 13,936 contracts, a decrease of just 189 for the week. Non-commercial and nonreportable traders combined held a net long position of 18,377 contracts, close to unchanged for the week. Commodity index traders held a net long position of 40,226 contracts, a slight increase.

TODAY’S GUIDANCE: The cocoa market may be relatively quiet due to the May Day holidays in Europe, but strength in the Dollar is likely to have a negative impact on prices. Further indications that Ivory Coast cocoa exports are ready to resume could add further pressure.

TODAY’S MARKET IDEAS: The technical action has been very strong, and while the supply fundamentals look negative, the market has seen strong buying in the last three sessions, leaving the market in a short-term overbought condition. July cocoa’s close above 3325 on Friday (the 50% retracement of March-April break) leaves 3416 as the next key resistance level. Key support is that 3325 level, with additional support back at 3234.

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While the cocoa market may be reacting to the final stages of the Ivory Coast political crisis, prices are still having some trouble sustaining moves in either direction. May cocoa came under heavy pressure again yesterday and was close to making a fresh downside breakout before a late recovery lifted prices away from the lows. A report that Ivory Coast President Gbagbo was in negotiations to leave the country and to institute a cease-fire was seen as the main negative factor for the cocoa market, as these actions will likely lead to cocoa exports from that country resuming fairly quickly. The EU has already said that they will remove their sanctions against the Ivory Coast once opposition leader Ouattara is in power. Violent confrontations continue, particularly near the main city of Abidjan, but it may have been the discovery of a mass grave in the western part of that nation the bought on international pressure to resolve the crisis. There will certainly be logistical problems moving cocoa supplies from the countryside to the two main port facilities, but there are indications that close to 500,000 tonnes are ready for almost immediate export. Cocoa bean exports from the Indonesian island of Sulawesi during March were close to 40% below last year’s levels, and which provided some mild support for the market during the session yesterday.

TODAY’S GUIDANCE: Although May cocoa has been relatively quiet so far this morning, the chances for a sharp down-move when official word of Gbagbo’s exit is received are still relatively high. However, any signs of a delay in the power turnover could result in a short-covering rally.

TODAY’S MARKET IDEAS: The market remains in a steep downtrend and is vulnerable to corrective bounces, but the trend looks to remain down and supply issues are significant. July cocoa resistance is at 3073 and 3107, with 2874 and 2746 as the next objectives. High open interest suggests that volatility could stay high for now. Consider buying puts on corrective bounces.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

The market pushed lower overnight, as a lack of new buying interest helped pressure prices. The cocoa market has rebounded away from the recent lows but it has been unable to the move because the uncertain situation in the Ivory Coast has kept traders on edge. May cocoa failed to hold onto early gains yesterday and fell back into negative territory by the close. There were few fresh reports from the Ivory Coast, although the President of Nigeria urged the UN to take more decisive action towards resolving the conflict. Reports indicate that the Brazilian state of Bahia produced their largest main cocoa crop since the 1996-97 season. With larger crops widely expected from the West African production area, any indication that the Ivory Coast export ban will end could put cocoa prices under heavy pressure. The large sell-off in the British Pound also puts pressure on cocoa, as it encourages arbitrage selling against the LIFFE cocoa contract.

TODAY’S GUIDANCE: May cocoa has been unable to put together a recovery during the last few weeks, even with most news headlines in this market focusing on an uncertain situation in the Ivory Coast. There may be some acceptance within the market that the supply disruption from this situation may be close to a conclusion.

TODAY’S MARKET IDEAS: After a three-day recovery bounce, the market looks vulnerable to resuming the downtrend. Bulls are waiting for supply disruptions from the Ivory Coast, but there seems to be plenty of cocoa moving. May cocoa resistance comes in at 3255 and 3315. Keep 2996 as next downside target.

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The cocoa market was unable to sustain a move up to new high ground on Friday, as the continued violence in the Ivory Coast appears to have lost some its ability to hold prices at these levels. May cocoa made another fresh, 32-year high on Friday but turned around and fell sharply lower as prices ended the day with heavy losses. Reports that Ivory Coast government workers were being paid a large portion of their pre-crisis wages may have deflated the recent rally, and end-of-week profit-taking after a $375 recovery from Tuesday’s lows may have put further pressure on the market. Over the weekend, the UN announced that it would be sending more troops to the Ivory Coast. In addition, rebel forces have announced that they had seized a second town in the western part of the country. While weekly cocoa port arrivals in the Ivory Coast have been sharply reduced from last year’s levels, the cumulative total is close to 19% above last season’s pace at this time. Cocoa bean exports from the Indonesian island of Sulawesi during February were up more than 12% from last year’s levels, in spite of a higher base price for export tax assessment. The Commitments of Traders reports as of March 1st showed non-commercial traders were net long 31,818 contracts, an increase of 1,271 contracts for the week. Non-commercial and nonreportable traders combined held a net long position of 40,078 contracts, up 1,747 contracts for the week. The buying trend is seen as a short term positive force. Commodity index traders held a net long position of 36,085 contracts, up 1,655 contracts for the week.

TODAY’S GUIDANCE: The escalation of fighting in the Ivory Coast may not only reduce the chances of a possible settlement, it also greatly increases the chances that the current export ban will be extended further into the future. Given the amount of cocoa supplies ready for export, however, any sign of a potential lifting of the ban could send prices sharply lower.

TODAY’S MARKET IDEAS: The sweeping reversal on Friday was a negative technical development, but the market did manage to close slightly higher on the week to avoid a weekly reversal. Outside market forces are positive this morning, but there is still no sign of peace.

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The cocoa market remains pointed in an upward direction, as the market received further evidence of potential supply disruptions during the near future. May cocoa was able to maintain a steep upward trajectory yesterday finishing up the session with large gains for the second day in a row and at their highest levels in over 30 years. The major news story of the day was a report that opposition candidate and presumptive election winner Ouattara will extend the current Ivory Coast cocoa export ban for two more weeks, now to conclude on March 10th. While not totally unexpected, the market was strengthened by the news as this may increase the chances that cocoa pods will begin to spoil and reduce what was originally forecast to be a fairly sizable crop. There are indications that official cocoa purchases in Ghana has fallen below last season’s pace on a weekly basis, but the cumulative totals for this season may be as much as 40% ahead of last season’s pace. While the market was already at the highest price level for over a year, the over $150 gain over the past two sessions could leave the market vulnerable to a quick pullback if there is any indication of a settlement between the two sides in the Ivory Coast conflict. Outside market forces also look somewhat negative. Indonesia announced they will be keeping their cocoa export tax steady during February.

TODAY’S GUIDANCE: Major uncertainty is the driving force of the market as the Ivory Coast is not in a position to store such a large harvest and if conditions worsen, more cocoa could be lost due to spoilage. Unless the political situation resolves itself soon, the bullish tone to the market is likely to persist. Given a negative tone from outside markets and the surge higher of the past few sessions, the market could see a short-term correction.

TODAY’S MARKET IDEAS: Resistance for May cocoa comes in at 3587 and 3610 with 3503 and 3452 as close-in support.

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This month’s rally has rocketed cocoa prices to their highest levels in nearly a year, as weekend news from the Ivory Coast brought the potential of an extended supply disruption much closer to reality. Opposition candidate (and presumptive winner) Ouattara called for a one-month export ban of cocoa and coffee, with the intention of cutting off revenues to the incumbent President Gbagbo. After the initial thrust higher, March cocoa then fell more than $100 off of its early highs when first reports indicated that many Ivory Coast export firms were functioning normally. A report that 300,000 tonnes of cocoa had already completed registration and were eligible for export added further weight to the pullback. However, later news that a major multi-national commercial firm was suspending their cocoa bean purchases from the Ivory Coast provided further support for the market. There has been support for the export ban from the US, but the EU has stated that a trade ban for Ivory Coast cocoa would be unlikely. A major Dutch cocoa processing facility that was damaged by fire last week is projected to be back at full capacity by the second half of next month. The reluctance of several European cocoa trade associations to immediately follow along with the export ban, along with a portion of the Ivory Coast cocoa export industry continuing with “business as usual” could nullify any disruptive effect that the export ban has on the flow of cocoa out of the Ivory Coast. With supplies already going overland to Ghana for shipment, and with those 300,000 tonnes already approved for export, the potential amount of cocoa held off the market could easily fail to match initial expectations.

TODAY’S GUIDANCE: With a bearish tilt to outside markets today, it will take a steady flow of negative news to see the market hold onto recent gains. The market has been up 9 of the past 10 sessions and is due for a correction, and there are a number of possible events that could spark increased selling.

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While the political situation in the Ivory Coast continues to generate the most headlines for the cocoa market, there has not yet been a supply constriction that could drive prices back towards the highs from earlier this month. The key “yardstick” for cocoa prices will likely be exports, which have held up fairly well after an initial shutdown after the first round of voting last month. March cocoa prices were only able to post a small gain for the session yesterday, reflecting more of the market holiday in London than any updated developments from the Ivory Coast. News reports that cumulative Ivory Coast port arrivals for this season are exceeding last year’s levels for the first time since the Presidential election has dampened positive sentiment for the cocoa market, as exports have only seen minimal disruptions during the past few weeks. A call for a general strike from opposition candidate Quattara has made little impact in Ivory Coast ports and cocoa processing facilities, also adding to the market’s sluggishness. News that a regional bloc of West African nations have threatened force to remove incumbent President Gbagbo over the holiday weekend continue to provide underlying support for the market. US and EU sanctions against the Gbagbo government are still being threatened, but they will only carry weight if they impact the supply flow of cocoa out of the Ivory Coast. The softs markets have been relatively subdued after the holiday weekend, particularly with the European trade just now getting back to limited participation levels. A key factor has been the near-optimal growing conditions throughout the West African cocoa production area, which has already lifted this season’s crop forecast for Ghana. End-of-year trading conditions could provide further volatility for the market, but the focus of the cocoa market during the final sessions of the year will remain on events in the Ivory Coast. The Commitments of Traders reports as of December 21st showed non-commercial traders were net long 13,000 contracts, an increase of 1,297 contracts. Non-commercial and nonreportable traders combined held a net long position of 16,282 contracts, up 1,479 for the week. The buying trend of the speculator is seen as a short term positive force.

TODAY’S GUIDANCE: On top of the other forces, a sharp turn down in the US dollar overnight is another short-term positive factor for the market to absorb. Of the 12 agricultural markets covered in the supplemental COT reports, funds were net buyers of 9 markets for the week ending December 21st and this appears to be positioning, not end of the year liquidation. While the fundamentals point to lower prices ahead, sellers still need to wait for the smoke to clear to expect a break. Longs, however, are not in much better shape, as the market could quickly see downside pressures if the incumbent negotiates a transition of power with the heads of state today! The short term technical action is positive, and the close above 3031 for March cocoa could spark a resumption of the uptrend, with 3140 and 3249 as the next resistance levels. If we see signs of a more peaceful transition ahead, 2822 would become initial support.

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Further stability in the political situation in the Ivory Coast may cause market attention to shift to the short-term jump in supply on the world market and spark a continued bear trend in the weeks just ahead. After posting strong gains early in the session yesterday, March cocoa turned and headed lower in what became a volatile session to start the trading week. Early reports of post-election violence from the Ivory Coast provided the initial strength for the market, but later news that a UN mission had declared the election was done in a democratic atmosphere put the market back under pressure. Port arrivals in the Ivory Coast this season were running nearly 8% ahead of last year, but that may have been due to a heavier delivery level for cocoa supplies in front of this weekend’s election. Near-optimal weather for West African production areas is expected to increase cocoa bean sizes later on this season. In the first six weeks of the season for Ghana, cocoa purchases were up 38.4% from last year. The Commitments of Traders reports as of November 23rd showed Non-Commercial traders were net short 134 contracts, a decrease of 7,597 contracts for the week. In other words, fund traders have exited their hefty net short position. The Nonreportable traders (small specs) were net long 1,737 contracts, an increase of 1,466 contracts for the week. Commodity Index traders held a net long position of 27,785 contracts, down 99 for the week. Ideas that cocoa is flowing from West Africa, a still relatively high price for cocoa plus a strong US dollar are all factors which could attract increased selling pressure over the near-term. ICE Cocoa warehouse stocks were down 9,649 bags to 2.612 million bags.

TODAY’S GUIDANCE: While Ivory Coast exporters are shut down for the week ahead of the poll results, traders are now confident that the cocoa will eventually work its way on the world market. The weak technical action last week leaves close-in resistance at 2787 and 2834 with some light support at 2729. A move through support would turn the short-term trend down and suggest another test of the September lows at 2626.

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While the cocoa market has begun to show some strength, it may have more work to do before resuming the rally from late last month. December cocoa was able to post a moderate recovery yesterday but was unable take a large step away from this week’s low levels. Reports of a nearly 20% decline in port arrivals in the Ivory Coast this season so far have provided some support to the market this morning, although this week’s election may have been a strong factor in slowing down recent supplies. In addition, news that several cocoa export firms were shutting down operations in front of the announcement of election results added to the cocoa market’s strength. The conclusion of voting in the Ivory Coast without any large-scale violence has acted to limit a rebound for cocoa prices over the past few sessions. However, early indications of a very close race between the two leading presidential contenders may raise tensions there as the vote counting continues. The market found little carryover support from strong gains in sugar yesterday, as that market moved to a new 30-year peak. The generally increasing production in West Africa is likely to remain a negative factor for the market going forward, although a move towards new highs for the British Pound may help to encourage arbitrage buying against the LIFFE cocoa contract. ICE warehouse stocks were down 10,726 bags to 2.874 million bags.

TODAY’S GUIDANCE: The market appears set to see some type of a recovery bounce but unless there is a sharp break in the US dollar, the focus of attention will be on absorbing a large main harvest from West Africa countries.

TODAY’S MARKET IDEAS: December cocoa selling resistance comes in at 2829 and 2852 with 2730 and 2651 as the next downside objectives and support.

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The market is slightly oversold after the sharp three-day set-back and appears set to see a continued probe of downside support levels. It may take a shift to much more bullish outside markets, election difficulties in the Ivory Coast or poor weather for the market to avoid a shift to a lower price level. Increasing supply and questionable demand are negative forces. December cocoa could not recover from early pressure yesterday and continued with the recent downtrend by posting sizable losses for the session. A huge sell-off in the British Pound added to the weakness in cocoa, but the market mainly continues to be weighed down by lower than expected third quarter grindings data from Europe and North America. The Ivory Coast reports that they produce over 100,000 tonnes of poor quality cocoa on average each season, and pledged that they would stop those quantities from getting to market by heavily regulating the moisture and mold contents for all beans sold for export. Traders report that weather has been much improved for drying out the crop in Nigeria in the key southwestern region. Sunny weather has helped the crop avoid black pod disease for the most part. The cocoa market faces increased supply in the next few months as the main crop harvests from West Africa pick up steam. Production is expected to increase from last year from this region but Indonesia production for the 2010/11 season could slip by near 10% due to poor weather; mainly too much rain. The main harvest for the Ivory Coast is occurring at the same time that the country tries to have national elections which are set for the end of the month. Traders remain nervous of potential transportation difficulties “if” there are disruptions due to elections. ICE exchange warehouse stocks were down 13,350 bags to 3.068 million bags.

TODAY’S GUIDANCE: Weather seems favorable for the Ivory Coast harvest and this should help keep the market in a short-term downtrend. Key resistance for December cocoa is at 2906. Watch for choppy to lower trade over the near-term with 2713 and 2595 as initial targets. A move under the September low would leave 2476 as a longer-term target.