The Hightower Report

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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.

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The market is finding some support from production uncertainty ahead and significant support from the drop in the US dollar and another new all-time high for gold posted overnight. These forces may help the market bounce ahead of harvest but traders are still bracing for increased supply just ahead and the potential for a world production surplus for this season. December cocoa was finally able to turn October’s sell-off around, and posted a moderate gain on the session yesterday. Uncertainty on the political situation in the Ivory Coast along with concerns that recent rains may have aided the spread of black pod disease in cocoa production areas helped to provide some support. News that next season’s cocoa production from Brazil could rise over 20% from last season made little impact with the market, as that nation’s share of global production has fallen dramatically over the past few years. There are reports the cocoa producers in the Ivory Coast held back beans during the final days of the 2009/10 season, in order to sell them with a higher guideline price this month. The Indonesia Cocoa Association believes the 2010/11 crop could reach 580,000-600,000 tonnes due to favorable weather and increased fertilizer usage. Black pod was an issue to hurt the 2009/10 crop but producers are optimistic for this seasons crop. If achieved, this would be up from near 540,000 tonnes this season. ICE Cocoa warehouse stocks were down 9,217 bags to 3.262 million bags.

TODAY’S GUIDANCE: Outside market forces are helping support overnight and the market is likely to see some short-covering from the hefty net short position posted in the last COT report but the upside looks limited due to increased supply just ahead. Indonesia production was not as good as traders had hoped for this season but the outlook for a 5-10% jump this year plus much better West African crops should help pressure. Selling resistance for December Cocoa comes in at the 2798-2831 zone with 2655 and maybe 2481 as downside targets.

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With outside market forces turning much more positive, the few commodity markets like cocoa where fund traders were holding a net short position are likely to see continued short-covering support. In the case of cocoa, trend-following fund traders (hedge funds) held a record high net short position in the last COT report so the news of a loose monetary policy from China appears to be a bullish force to spark additional short-covering and some new buying. December cocoa pushed to the highest level since August 24th overnight with a surge higher in gold and other commodities and a weaker US dollar helping to support. December cocoa continued with a sharp rally away from the recent lows yesterday, but could not maintain its upside momentum and fell back from the highs by the close. Cocoa exports from Nigeria this season were up over 40% from last year through the end of June, mainly due to good weather over the course of the growing season. News of a smaller than expected crop from Indonesia, however, was enough to support. There were 29,910 tonnes of cocoa delivered against September LIFFE contracts, far below the over 240,000 tonnes during the July contract delivery period. Cocoa arrivals in Brazil are over 9% behind last season’s levels at this time of the year. There are scattered rains and some heavier rains in the forecast for West Africa and traders will continue to monitor this situation. For now, with sunshine in between rain events, the crop outlook remains favorable for the main crop in the Ivory Coast. Exchange warehouse stocks were down 27,243 bags to 3.313 million.

TODAY’S GUIDANCE: The market seems to have priced-in big production increases for the crop but traders are now having second thoughts about too much rain in West Africa and the fears of a large drop in production from Indonesia just add to these fears. Short-covering remains a bullish short-term force. Close-in support for December cocoa comes in at 2760 and 2727 with 2888 and 2892 as near-term targets.

TODAY’S MARKET IDEAS: Short-covering bounce could be significant.

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Traders are waiting for a low to be put in for this recent sell-off as the cocoa market remains within striking distance of new 13-month lows. In spite of enormous strength shown by the other soft markets, and with global market sentiment continuing with its positive rebound, the cocoa market has been unable to move back above the trading range of the past two weeks. In particular, December cocoa was unable to sustain this week’s recovery from the lows of the move, and ended yesterday’s session with a moderate loss. Carryover support from stronger global equity markets failed to give any meaningful support to the market, and a sell-off in the British Pound led to arbitrage selling against LIFFE cocoa. Expectations of large production increases from West Africa continue to cast a long shadow over the market, and this has limited the ability for December cocoa to put together any sort of longer-term rebound. One of the longer-term positives for this market is ideas that the exchange stocks at the LIFFE were exhausted by the delivery fiasco with the July contract. This may prove to be a mirage as nearby LIFFE futures have now moved to a discount versus the deferred months. ICE exchange stocks for cocoa were down 10,460 bags to 3.473 million bags.

TODAY’S GUIDANCE: At this point, the most likely scenario would be for the market to make a bounce towards the upper end of the recent trading range. However, the underlying long-term supply/demand outlook has this market pointing squarely towards the downside. Close in support for December cocoa comes in at 2705 and 2682, with 2779 and 2810 as resistance. The market still is looking for a move above 2779 to confirm the low.

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The market is in a steep downtrend and in a transition year with growing expectations that supply will be higher than demand for the coming year. However, the sharp losses of the past few weeks have left futures oversold technically and a turn back down in the US dollar overnight may help spark a corrective bounce. December cocoa continued to extend its decline yesterday with fairly sharp losses, reaching its lowest price levels since July of 2009. Widespread forecasts for a global surplus during the upcoming crop year are beginning to have a negative impact on the cocoa market, as this would be a change from the deficits of recent years. Recent rains in the Ivory Coast have improved the prospects for this season’s cocoa crop. A mild rebound in the British Pound was able to provide a small amount of support to the cocoa market. A wet and sometimes cooler pattern in the Ivory Coast in the forecast into next week is not what the crop needs to mature ahead of harvest in the fall. Sun and less rain will help the crop mature and will help the crop avoid black pod disease. For now, conditions look favorable to see a large Ivory Coast crop and this could help boost estimates for a world production surplus. Surplus estimates are seen near 75,000-100,000 tonnes for the coming year and these likely assume steady growth in demand. Given the historically high prices of the past year and a weakening European and US economy, demand may not be as high as expected. There were 22 deliveries posted against the September contract bringing total deliveries so far to 609. ICE cocoa warehouse stocks were down 21,210 bags to 3.567 million bags.

TODAY’S GUIDANCE: The downside break-out leaves 2682 and then 2495 as longer-term downside objectives. Selling resistance emerges at 2810 and 2829 for December Cocoa.

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The market remains in a tight consolidation near the low end of a 5-month trading range and seems to have the supply fundamentals to move to another lower price level ahead. December cocoa continues to have difficulty with mounting a recovery from this month’s heavy sell off, as prices ended the day with a minor loss. Farmers from the Ivory Coast are projecting this season’s cocoa production will show a large increase over last year. Even the late season production may see a minor jump in production as some of the new crop may be ready early. The shift to a world production surplus for the coming season after a few tight years is likely to keep the price trend down unless there are developments in outside markets or the supply disappoints. For now, however, the market is pricing in a large main crop harvest which normally begins in September. Tightening exchange stocks continue to provide some support. While this season’s cocoa production from Cameroon will have nearly a 4% decline from last year, there are expectations that this shortfall will be fully recovered by the end of next season’s crop year. Yesterday was the first notice day for the September cocoa contract at the ICE with deliveries of 513 contracts posted. Arrivals for the week ending Sunday from the Ivory Coast increased to 9,000 tonnes from 2,022 tonnes for the same week last year. ICE cocoa warehouse stocks came in at 3.685 million bags, down 9,391 bags on the day.

TODAY’S GUIDANCE: While the market is attempting to form a base of support near the 2860-2850 level, the declining open interest during the consolidation phases is not a good sign for the bulls with speculators still holding a net long position in the last COT report. The market is in a short-term oversold condition so we can not rule out a recovery bounce but the pattern is typically considered a continuation of trend pattern and we would keep 2828 and maybe 2682 as downside objectives for December cocoa. Resistance is 2917 and 2979.

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Fund buying across the spectrum of agricultural commodity markets yesterday and continued trade house buying in London helped keep the market in a well defined uptrend channel. The market continues to find support from tightening exchange stocks and a perceived tight supply situation in Europe. Ideas that the European economy is doing much better than expected along with bull spreading and a widening inversion in London is also helping to support. End user buyers remain on edge as deliverable stocks are tight and a large London trade house took a large portion of deliverable supply off of the market with the July expiration. Cocoa supply should be on the rise in the months ahead but near-term supply is tight and quality of the mid-crop out of Ivory Coast remains an issue. The main crop harvest does not start until October. Traders see a slight world production surplus for the 2010/2011 season but the focus of attention into the fall could be the size of the Ivory Coast crop. Many traders see the crop near 3.75 million tonnes from 3.518 million last year. Brazil arrivals remain behind last year’s pace but some traders see supply on the rise. September cocoa was able to post a sizable gain for the session yesterday but finished well below the highs as a sharp mid-session rally was quickly reversed. Cocoa’s strength was sustained throughout the session, in spite of a turnaround in the British Pound. Cocoa exports from the Indonesian island of Sulawesi during July were up nearly 50% from last season’s totals. However, cocoa exports from Cameroon this season are running over 4% below last year at this time. ICE cocoa warehouse stocks were down 55,790 bags to 3.819 million bags.

TODAY’S GUIDANCE: Commercial traders are meeting with London exchange representatives to discuss the deliveries situation in July and there is continued talk of position limits to discourage speculation. This may end up having some influence ahead. A continued tightening of exchange stocks in the US and a pick-up in fund buying activity continue to provide underlying support. The close above $3092 (now close-in support) has improved the technical picture and opens the door for another test of the July highs. Resistance is now at $3180 and $3228.

TODAY’S MARKET IDEAS: It will likely take a turn down in outside market forces or a shift to increasing exchange stocks to turn the minor trend down.

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With a weak US dollar and positive action from outside market forces, the bounce yesterday is not too impressive and the market may see choppy to higher trade over the short term to correct the oversold condition before a resumption of the downtrend. September cocoa prices ended slightly higher but well off of the day’s peak on Monday after a failed attempt to trade above resistance at $3020. Cocoa continues to consolidate last week’s dismal price action. Excess rain and moisture has made the process of properly drying the beans increasingly difficult in the Ivory Coast and at the same time has lowered the overall quality of the mid-crop, but the outlook for the main crop in October is improving. Some cash traders said they have had to turn away most (up to 80% on some accounts) of the cocoa beans offered due to insufficient quality. Quality issues have restrained supplies and increased the year over year supply deficit. Total Ivory Coast arrivals stand at 1.082 million metric tonnes since the season began last October and are about 1.9% under year ago levels. Ivory Coast production is on pace for its lowest levels since the 2004/05 season, exacerbated by excessive rainfall and years of under investment. However, reports of prolonged periods of sunshine may have helped cocoa pod development. Still, weather forecasts for lower temperatures could slow the start of the main crop in October, which in turn would further damage buds, weigh on quality and reduce production. Indonesia crop conditions appear to be improving with decent weather recently. Technically, September cocoa is trying to trend higher helped by a “higher” high and low on Monday. However, the intermediate trend is down for cocoa and would require, at least, a short term move back above $3020 to flip the sentiment positive. In the event prices are able to turn higher, there is a retracement target above at $3060. In the meantime, we would like to see if the current attempt at higher prices has any legs before getting overly aggressive on the short side of the cocoa market.

TODAY’S GUIDANCE: Resistance for September cocoa comes in at $3020 and $3056. Keep $2806 as the next target.

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Our longer term viewpoint is bearish for cocoa, but tightness in New York and London are supportive near-term. Exchange stocks continue to decline, which should keep bears cautious. London is trading at a stiff premium to New York, and nearby London contracts are trading at a premium to the deferred contracts. The large number of contracts still open on the soon-to-expire London July futures is also sparking concerns that as much as four-fifths of the exchange stocks could be used up in the delivery process, leaving precious little for the September delivery. On top of that, heavy rains in the Ivory Coast are raising concerns over disease problems. Supplies tend to be tight this time of year, ahead of the main crop arrivals which begin in October, and there seems to be a concern over the chance for some extreme tightness this year. September cocoa came under mild pressure yesterday but remained well entrenched within its recent trading range. A late sell-off in the British Pound weighed on the cocoa market, and the ongoing delivery situation with the London contract appeared to have little impact on NY prices yesterday. Cumulative port arrivals in the Ivory Coast for this season continue to gain ground, but they still remain close to 1% behind last season’s levels. Heavy rains continue to have a negative impact on this season’s cocoa crop in the Ivory Coast, due to transportation issues and the potential for disease outbreaks. ICE exchange warehouse stocks were down 30,187 bags to 4.073 million. A selling trend from fund traders and speculators as indicated in the recent COT reports could be seen as a short-term bearish force. It may not take much in the way of positive action in London to spark a significant run higher in New York.

TODAY’S GUIDANCE: With a potentially volatile situation developing in London, the NY futures could be taking their cues from that market over the near term. The US stock market was higher in overnight futures trade, and if it continues to gain ground today, it in could also lend support. If the market breaks out of the recent consolidation with a move above $3028, it would be considered supportive. Look for support at $2974 and consider $3084 and $3227 as upside objectives if $3028 is taken out.