Today's Spotlight Market

The recent sell-off in Cocoa may be attributed to weather forecasts calling for a weakening of the potential "El Nino" weather event. However, current inventories in the Ivory Coast are relatively tight, and any signs of a sustained drought could set the trend for prices moving over $3,000 per ton.

Fundamentals

Many cocoa futures traders are watching the weather forecasts, as the potential El Nino weather event may increase the chances for drought conditions in West Africa. Earlier forecasts were calling for a "moderate" El Nino event, where the waters in the Pacific Ocean begin to warm, especially near the equator, which has in the past brought drought conditions to Africa and Southeast Asia. Some traders have been pricing a "weather premium" into Cocoa futures, as the potential for a sharply reduced 2013 crop cannot be ruled out. However, there is some talk that the potential El Nino event may be much weaker than anticipated, which has helped to pressure prices lately. Current analysts' estimates for the size of the 2012-13 Ivory Coast Cocoa crop are running just over 1.3 million tons, but this figure can turn sharply higher or lower depending on the level of moisture received. In addition to potential weather issues, some Cocoa traders are also keeping a close eye on events out of Europe, as any major economic changes can affect demand. The Euro Zone accounted for about 1/3 of world Cocoa grindings this past year and is the leading consuming region for Cocoa. Some speculators have been adding to their net-long positions in Cocoa recently, with the most recent Commitment of Traders reports showing just over 4,000 contracts being added for the week ending September 11th, although some long liquidation selling appears to have taken place during last week's price correction.

Technical Notes

Looking at the daily chart for December Cocoa, we notice the recent rally that started at the June lows has been a series of fits and starts, with short-term $200 price corrections not uncommon. We are currently in the midst of a price correction, and some traders may wish to watch how the market reacts as prices near support at 2500. A price bounce at this level may signal that another run for the highs at 2700 is in the works, where as a collapse in prices below 2500 could see prices correct to the 2360 area. The 14-day RSI has turned neutral, with a current reading of 47.40. Near-term resistance is found at 2650.


Mike Zarembski, Senior Commodity Analyst

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