Unease over Ivory Coast cocoa reforms will limit the downward move in prices, Barclays Capital said, even as futures looked to end a negative week on a positive note, underpinned by a fresh outbreak of violence in the African country and by a forecast of a world production deficit.

Cocoa prices have suffered a reversal this week, dropping 4% in London as of Friday's low and more than 5% in New York, as rain eased concerns over the impact of dry weather in production in West Africa, the top producing region, besides

However, "the downside risk is limited", BarCap, said, warning of the "potential disruption in the coming weeks" from a shake-up by Ivory Coast to its cocoa sector, the world's biggest, which will see a government marketing board, the Coffee and Cocoa Council, handle the country's sales.

Macquarie has already warned of the potential for an upward spike in prices if the council, which has sold most of the 2012-13 harvest ahead a prices below recent highs, offers growers too poor a payout, prompting them to smuggle crop to other markets.

And BarCap said that "there may be some short-term supply pains" ahead given the discontent at some of the council's operating methods.

Unresolved problems

"The council's complex pricing system is viewed as lacking transparency and not fully reflecting the costs that buyers face," BarCap analyst Kate Tang said, flagging "unknown costs such as the price to pay for unauthorised roadblocks".

"There remain concerns about how cocoa deliveries will be guaranteed and whether the government has suitable storage facilities."

A big bone of contention revolves around bean quality, and rules which have stripped buyers of power to discount prices in line with grade of crop delivered.

"With the new system, discounting is banned, leaving exporters without a means for quality control," Ms Tang said.

'There may again be a lot of smuggling'

Furthermore, Ivory Coast cocoa merchants are threatening to block supplies, or return to smuggling beans through the country's porous borders, if a prolonged dispute with officials over transport costs is not resolved.

Ivory Coast producers and merchants have a history of illegally transporting beans to Ghana when prices are higher in the neighbouring country.

"If the price guaranteed by the Coffee and Cocoa Council is not as good as that offered by Ghana or other nearby West African countries, there may again be a lot of cross-border smuggling," Ms Tang said.

ICCO forecast

The comments came as three people were killed in Ivory Coast in renewed attacks on army and police buildings in Abidjan, the first since an outbreak of violence in August.

The government has blamed supporters of Laurent Gbagbo, the former president, for the unrest, although the Gbagbo camp has rejected the accusations.

Separately, the International Cocoa Organization, in its first estimate for 2012-13, forecast a world production deficit, thanks to the dearth of rainfall in West Africa, but declined to reveal numbers.

Cocoa for December closed up $2 at $2,521 a tonne in New York, for only its third day of gains in the last 11 sessions, while easing $5 to £1,613 a tonne in London.