Cocoa rally questioned, as futures hit £2,000

Has the cocoa rally - which took London futures to £2,000 a tonne on Thursday for the first time in three years - run its course for now?

Certainly, Commerzbank warned over the potential for a sharp retreat, even as futures were setting three year highs on both sides of the Atlantic.

The run-up in prices - which drove September cocoa futures to $3,234 a tonne in New York on Thursday, the highest for a spot contract since May 2011, and raised the London contract to £2,000 a tonne for the first time since July 2011 was not being driven by supply and demand factors.

"There is little reason from a fundamental viewpoint for cocoa prices to keep being driven ever higher," the bank said, viewing as "poorer" the latest data for processing volumes of the bean in Asia and Europe.

Europe's cocoa grind, down 0.2% in the April-to-June quarter, has been widely viewed as disappointing, although many other commentators have taken a more upbeat view of the 161,805 tonnes processed in Asia - up 5.2% year on year, if below the 170,684 tonnes ground in the last three months of 2013.

On the production side, Commerzbank flagged a "very good mid-crop being harvested in West Africa" too.

'Growing speculative interest'

The bank, noting "an extremely high volume of trading" this week, attributed the rise in futures to interest from hedge funds, which have a record of active involvement the cocoa market, most famously the 2010 purchase by Armajaro of some 240,000 tonnes of the bean.

 "More cocoa futures contracts were traded on the Liffe and on the Ice yesterday than on any other day this year, which points to growing speculative interest," Commerzbank said.

With, apparently, little fundamental cause for the latest leg up in prices, "the potential for a price correction is increasing".

'Turned the market upside down'

At London broker Marex, Eric Sivry, head of agri options, also questioned whether supply and demand factors had been forgotten.

In the first three days of the week, "London gained £80 a tonne on the front month [futures contract] and £50 a tonne on the second one.

"Ice's front month gained $140 a tonne, and $100 a tonne the second one. Why? There is no immediate fundamental rationale behind the move."

He traced the increase to a so-called "trade at settlement" order, for 3,000 contracts, priced at the close of trading in New York on Monday, betting long on the spread between September and December futures.

"It turned the market upside down", Mr Sivry said, highlighting the jump in volumes on Wednesday to 110,000 contracts, which he termed "close to a record outside of an expiry period", when position swapping or closing raises trading.

The cocoa price rises this week have been particularly evident in the September contracts which over Wednesday in London raised by 52% to £50 a tonne their premium over the December lot, and in New York more than doubled their premium to $54 a tonne.

'Needed challenging'

Mr Sivgny added: "We have seen many rallies in cocoa and many 'plays' in the front spreads over the years - but in such large volumes outside of an expiry zone? Probably never."

He attributed the move potentially by a bet on an investor holding a large net short position "that needed challenging" before speculators begin their so-called "roll", in which they sell out of nearby futures contracts as they approach expiry and switch investment to more distant lots.

In theory, with the roll, expected to begin in two weeks' time, encouraging selling of the front contract, going short ahead of it should be a profitable move.

As for whether prices will indeed begin to move down now, well, there are other factors to consider too, beyond fundamentals.

"The market now looks ripe for its bi-monthly retracement £100 higher," a trend which been occurring for more than a year.

But that is a whole other story.

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