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December cocoa put in a weak performance on Wednesday settling lower which was a bit surprising since a number of critical outside markets influences were bullish. Certainly part of the choppy trade action in December cocoa yesterday can be tied to position roll over into the March contract ahead of the December contract’s first notice day on November 16th. This may continue to put pressure on December cocoa into expiration as traders’ book profits following the move to 30 year highs. But since March cocoa only managed to settle with marginal gains yesterday despite a sharply lower Dollar, higher Pound and firmer equity trade, perhaps this suggests the fund investment in cocoa is starting to wane. The last COT report showed index funds sharply increasing their net long position in cocoa to 29,167 contracts as of October 27th which was less than 2,000 contracts below the record net long level seen mid-last year and clearly showed the market to be overbought. Cocoa has had a tight positive correlation to equities and negative correlation to the Dollar but this relationship seemed to break down yesterday. Cocoa has certainly strengthened in connection to a general bullish environment for commodities backed by a fundamental outlook for another low production year in the Ivory Coast. But perhaps seeing a strong harvest supply flowing into the Ivory Coast ports is staring to ease the tight supply outlook a bit. In fact, the market hardly reacted yesterday to a report that a widely followed private industry analyst lowered his production outlook. The Ivory Coast crop still needs good rains during November to ensure a good harvest through the end of the season. But if Ivory Coast weather improves to promote a higher harvest, we suspect it will be difficult to keep the cocoa market in the vicinity of 30 year highs without some type of crop problem developing. And if a less bullish supply side outlook is seen, we suspect speculative fund interest in cocoa could also die down.
TODAY’S GUIDANCE: Bullish outside market influences yesterday should have provided stronger price support to the cocoa market and that may be a warning sign for the bulls. A firmer Dollar appears to be putting some early pressure on cocoa and uncertainty ahead of a key US employment report out on Friday could also encourage more profit taking in cocoa, especially if today’s news on jobless claims is disappointing.
TODAY’S MARKET IDEAS: The Fed’s outlook for a slow recovery may be undermining expectations for a recovery in demand. Cocoa still looks to be in the midst of a correction from 30 year highs since the market failed to attract strong buying interest yesterday despite very supportive outside market influences. Roll over activity is likely another factor weighing on the December contract.
