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
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.
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
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
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.
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.