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ANALYSIS: Cocoa bulls in the driving seat

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The net long investment position in cocoa futures on the Intercontinental Exchange (ICE) rose by 8,332 contracts in the week to February 11, putting the total at 42,628, nearly the highest in three years. The net long position could been even higher this week.

 

Ivory Coast’s mid-crop expectations underpin the bullish mood

 

There is a solid reason behind this bullish mood - the west African country Ivory Coast, responsible for producing some 40% of the world’s cocoa beans has been unusually hot and dry. The harmattan season began on November 29, during which (as usual) hot dry winds blow across west Africa. This year’s harmattan has been abnormally harsh and long-lasting and will dent Ivory Coast’s important cocoa mid-crop.

 

The insufficient rainfall is bound to reduce the size of the mid-crop and could also act as a drag on the main crop. Expectations had been that mid-crop arrivals would be between 450,000 and 500,000 tonnes. The mid-crop, which lasts April to September, was officially 527,000 tonnes last season. This season’s mid-crop arrivals could be as low as 350,000 tonnes.

 

Farmers hope for much higher prices

 

Ivory Coast farmers are also said to be hoarding stock, awaiting the $400/tonne "living income differential", a premium that will be imposed on all 2020/21 cocoa sales. This premium is designed to guarantee higher prices for farmers and alleviate poverty.

 

While last season’s total mid and main crops was officially put at 2.18m tonnes, trade expectations for the current 2019/20 season are being scaled back from 2.2m tonnes to much less.

 

For now, cocoa bulls are in the driving seat. With Ivory Coast so undershooting expectations, there’s no other sensible place to be.

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