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The market seems to be in a position to see another leg down over the near-term unless there is help from outside market forces. The December cocoa contract forged a big gap down failure on Thursday but the trade did try to buy on the decline. Apparently the cocoa market continues to extract a weather premium from cocoa prices that might have been put in place with the rally last summer and fall. While the fear of cocoa production losses in the Pacific might remain an issue for some traders, the prospect of incoming supply in Africa would seem to leave the bear camp with the near term edge. The lack of a significant impact on the Indonesia crop of any major weather difficulties after traders “assumed” a loss due to El Nino remains an underlying negative force. Indonesia will set a monthly export tax in an attempt to support increases in the local grind industry. Output for the year ending September is still expected to reach near 500,000 tonnes, up 2% from last year. There are still plenty of longer-term production issues with the cocoa market and there is some concerns that even with the surge higher in prices in the past year that producers in the Ivory Coast are still shifting to rubber production due to disease issues and volatility of production. Producers can make a monthly income with rubber trees instead of a few pay days a year. Ghana purchases through March 11th have reached 512,792 tonnes which is down 5.5% from last year but due to smuggling, it is difficult to assume anything from these numbers. Traders see the harvest this year as high as 800,000 tonnes but see deliveries up to 700,000 from 710,000 in deliveries last year.
TODAY’S GUIDANCE: Mid-crop weather has been favorable so supply is still a potential bearish force just ahead. We still see the need for lower prices which may be necessary to spark better demand. Selling resistance for July Cocoa comes in at $2875 and $2897 with next downside objective at $2691.
