Sunday, February 9th, 2020

Cocoa futures finished the week up 4.43% in New York and up 2.92% in London basis the March contracts – the pound/dollar finished the week down 2.38%. Prices reacted to the March option expiry in New York on Friday, which triggered a sharp move in the vols across both markets as the shorts were forced to cover - the expiry resulted in 23,648 lots of calls being exercised and only 228 lots of puts. Low certified stocks in New York (2,117mt) in addition to exceptionally dry weather in West Africa during the harmattan period have led to continued speculative buying across both markets. Gross managed money longs in the New York market are now at their highest level since September 2nd, 2014, which is the record. Despite dry weather in West Africa, the high cash prices for cocoa seen over the past year (higher for next year due to LID) will more than likely result in large main crops in West Africa along with larger crops in the second-tier origins at a time when the rate of demand for cocoa products is falling. To put in perspective how good prices currently are, Ivory Coast could raise the farm price in the 2020/21 season back to a record 1,100 CFA francs/kg if they started selling cocoa on an outright basis (calculation uses average price of Dec’20, Mar’21, and May’21 contracts in New York). Using the same calculation for London, Ivory Coast could only raise the farm price to 990 CFA francs/kg if they sold cocoa on an outright basis today. There is an obvious economic incentive to hedge 2020/21 cocoa in New York over London, which should help narrow the arbitrage from current levels. Higher prices will continue to increase the odds of bumper crops during the 2020/21 season and will also increase the pace of demand destruction. Cash prices against the March contract in London are currently £63/mt cheaper than purchasing cocoa with the living income differential against the December contract; however, the cost of carry from March to December is too expensive to justifying buying cocoa today before the living income differential takes effect. Our deficit for the 2019/20 year has grown to 75kmt, which we believe is fundamentally neutral, especially with a high probability that the market is in surplus during 2020/21 assuming normal weather.

Ivory Coast’s Gepex cocoa processing rose 3.30% in January to 48,464mt when compared with the same period a year ago. Interestingly, product exports during October – December out of Ivory Coast are down 1,722mt from last year. With the weakness in the emerging market countries expected to continue in the near future, the rate of consumption growth will continue to slow. While the mid-crops are likely at risk this year due to the excessive dryness, the slower rate of consumption growth is offsetting the odds for a larger deficit.

Gross Managed Money Long, New York Cocoa
Over the course of the COT week, the U.S. dollar depreciated by 0.06% while the Bloomberg Agricultural Subindex fell by 2.13% - since Tuesday, the U.S. dollar traded to its highest level since October 11th and finished the week on the high at 98.684. President Trump is expected to release a $4.80 trillion budget on Monday that charts a path for the start of a potential second term, proposing steep cuts to social-safety-net programs and foreign aid along with higher outlays for defense and veterans. Federal Reserve policy makers and personnel will be in the spotlight this week as the global economy continues to grapple with the impact of the coronavirus outbreak. Fed Chair Jerome Powell will deliver his semi-annual testimony before Congress, with the economic cost of the rapid spread of the virus likely to be one of the issues he’s questioned on. This week will also see a host of other Fed speakers, with about a half dozen Fed officials due to make public comments. The European
Commission will update its economic forecasts on Thursday and offer its take on the recent stabilization in the area’s economy. The combined net managed money position in New York increased by 3,701 lots to be 66,752 lots long from the addition of 4,796 new longs and 1,095 shorts. Gross managed money longs are now near the 2014 record at 105,695 lots – there have been 30,777 lots of gross longs added since January 14th at a volume weighted average price of $2,790. Open interest changes since Tuesday would suggest that the amount of gross managed money longs have passed the 2014 record as the spec continues to add length at higher prices. The combined net managed money position in London fell by 887 lots to be 68,223 lots long from the addition of 287 longs and 1,174 shorts. New York and London cocoa are currently two out of the top three longest agricultural commodities on the board relative to their historical range.

Prospects for more precipitation in West Africa have not improved. Precipitation is expected to be dryer than normal for the next two weeks with an average of 7.00mm of rain expected in Ivory Coast and 3.00mm of rain expected in Ghana. If the forecasts for the next two weeks are correct, this will be the driest harmattan since the 2015/16 crop. Cocoa trees tend to produce bumper crops after a period of significant dryness, with the most recent example being 2016/17. Higher cash prices for the past year in addition to a living income differential and falling rate of demand are putting the cocoa market on track for a repeat of 2016/17 assuming normal weather over the summer months. If true, prices are unlikely to move significantly lower until more is known about next year’s main crops, which will be in July or August of this year.


As always, thank you for reading. Please feel free to reach out with any questions.








Best Regards, Eric Bergman Vice President JSG Commodities 203.853.3000 www.jsgcom.com

This report has been compiled for general informational purposes only. While every effort has been made to ensure accuracy, Jenkins Sugar Group, Inc. assumes no responsibility for errors and omissions.