September cocoa supply crunch thrown into doubt

Trade the News

Friday September 03, 2010 10:01:14 AM GMT

* Liffe September cocoa trades at discount to December

* West Africa crop prospects improve

By Sarah McFarlane and Nigel Hunt

LONDON, Sept 2 (Reuters) - The prospect of a supply crunch in the Liffe cocoa market this month has been thrown into doubt, dealers said on Thursday, as price falls pointed to processors having enough stock ahead of arrivals from West Africa's crop.

"The market is definitely pricing in that there's going to be a big crop," a European trader said.

After commodities firm Armajaro scooped up nearly all available tenderable cocoa at the July futures contract's expiry, industry players were concerned that the stockpiling could be a precursor to an even more daring speculative play on September.

The July and September futures contracts are regularly vulnerable to a shortage of fresh cocoa supplies prior to the harvest in the largest producing region, West Africa, in September/October.

September, Liffe's front month cocoa contract, has dipped to a 15 pound discount to December, from a premium which peaked as wide as nearly 200 pounds, indicating supply concerns have eased.

Forecasts for 2010/11 West African cocoa production have improved in recent months with Olam International, the largest player in the cocoa industry in terms of origination and supply, forecasting a record crop.

"You could assume there will be shipments arriving (in Europe) in October... harvest's starting on time and looks good," said one European trader, adding that if it had been a late crop there could have been panic in the market.

The cocoa market's return to a contango structure, where contracts become more expensive the further out they are dated, also makes carrying cocoa more affordable as the costs of storage and financing are at least partly covered by the cocoa holder receiving higher prices for later dated contracts.

PREMIUM POSSIBLE AGAIN

Dealers did not rule out the possibility of the discount on September returning to a premium, pointing out that if funds were short of the September contract they would need to cover positions over the coming weeks.

"I wouldn't count against it going back to a premium," a London-based broker said.

Most funds cannot take delivery of cocoa beans and will have to either close out short positions or roll them forward before the contract expires on Sept. 15.

Volume on the September contract has been low as many of the traditional market participants avoided the contract, reluctant to second-guess what Armajaro's next move might be, dealers said.

"The lack of volume indicates traditional players such as trade houses and processors have made their decisions and moved forward," a London-based broker said.

NYSE Liffe cocoa prices have fallen over 20 percent since the July contract expired, as improving supply prospects from West Africa weighed. (Reporting by Sarah McFarlane and Nigel Hunt; Editing by Anthony Barker)

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