May cocoa ended higher on Tuesday as the market consolidated after Monday’s steep loss. Certainly part of yesterday’s recovery was technical, but a bullish report by the ICCO calling for a larger global cocoa deficit also inspired a certain amount of buying. May cocoa has traded higher overnight as the market is seeing spillover support from gains in equity markets and general commodity prices. We also suspect the cocoa market is seeing some further buying interest on the ICCO’s sharp upward revision in the deficit for this season which is now predicted to be 192,000 tonnes compared to their previous estimate for an 88,000 tonne shortfall. The cocoa market also seems to be finding support from a fresh dose of economic optimism stemming from the prospect for more government stimulus from China. The cocoa market’s oversold condition may enable a recovery back to the $2,372 to $2,416 price level given the ICCO’s latest bullish prediction. But we also think gains in this market could be quickly cut short on further indications of a deepening global recession. In fact, if the economic data continues to show global conditions continuing to worsen, we suspect traders will start to doubt the size of the ICCO’s deficit forecast. The organization says they are only looking for a 2.1% decline in cocoa grindings this season, but the prospects for a sharper decline in chocolate demand seem a lot higher. In fact, a widely followed investment bank is sticking to their forecast for only a 45,000 tonne cocoa deficit for the 2008/09 season which seems to be a bit more in line with the macroeconomic outlook. We also question the ICCO’s estimate for a 5% decline in global cocoa production since Ivory Coast port deliveries continue to close the gap with last year while good rain events in West Africa leaves the prospect for good mid-crop harvest prospects for several key producers.
TODAY’S GUIDANCE: If May cocoa can make a push above $2,313 it could open the door for a test of the $2,372. But we have doubts that the market will fully embrace the ICCO’s outlook if economic conditions continue to worsen. We suspect the price recovery in May cocoa this week will be short lived since we still see a variety of economic and financial industry headwinds on the horizon that could easily end up pressuring May cocoa back to the $2,200 price level.
TODAY’S MARKET IDEAS: Close-in resistance for May cocoa comes in near $2,313 then near $2,372 with support at $2,282 and then $2,200.