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Short-covering Creates Near-Term Bottom for Cocoa Prices

Wednesday, March 15, 2017

Today's Spotlight Market

Just prior to the recent Cocoa price rally, large speculators were busy adding to their existing short positions according to the Commitment of Traders report. During the reporting period ending on March 7, non-commercial traders added just over 2,100 new net-short positions during the week which increase the overall net-short position to 29,164 contracts. Both commercial and non-reportable traders are currently net-long Cocoa futures adding to positions as prices moved lower.

Fundamentals

The Cocoa market has been in a "textbook" example of a bear market since August of last year as an improving supply picture, especially out of West Africa, has sent prices reeling. The International Cocoa Organization or ICCO is forecasting that nearly three-fourths of the global Cocoa production is expected to come from the African growing regions this season with significant production increases expected from the two leading cocoa producing nations--Ivory Coast and Ghana. While the prospects of increased production has triggered increased selling pressure by speculators. Lower Cocoa bean prices are expected to encourage increased demand for Cocoa products which should encourage an increase in Cocoa grindings by processors especially in Asia and Africa. Grindings out of Europe and the America's are expected to remain unchanged, however, this coming season which could help blunt any significant rally on futures prices especially if actual production increases materialize. The wildcard remains the weather, with some forecasts calling for a return of an El Nino weather event for the upcoming crop season. Traditionally, an El Nino weather event has produced drier conditions in the key Cocoa production areas of West Africa and should this occur, we could see the Cocoa supply situation move back to a deficit next season and potentially bring to an end the bear market for Cocoa prices.

Technical Notes

Looking at the daily chart for the front month May Cocoa futures contract, we notices prices rebounding back above the $2000 per ton level as the market appears to have produced a near-term bottom. Prices moved upward the past few trading sessions, mainly attributed to short covering buying by large speculators who have been net-short Cocoa futures for the past several months, following a failed test of the major low at 1869 made back on March 2. We now see prices trading back above the 20-day moving average for the first time since late January but we should note that prices remain well below the widely watched 200-day moving average which currently hovers over $500 per ton above current price levels. Price momentum has strengthened, with the 14-day RSI rebounding from near oversold readings to a more neutral 56.30 as of this writing. Strong support is seen at the recent low of 1869 with chart resistance noted at the February 1 high at 2146.

Mike Zarembski, Senior Commodity Analyst