Sunday, March 22nd, 2020

Cocoa futures finished the week down 8.04% in New York and down 1.29% in London basis the May contracts – the pound/dollar finished the week down 5.29%. As expected, speculative liquidation continued throughout the week with the entire world in ‘risk-off’ mode. The specs sold to industry, who took advantage of the weak pound/euro and picked up cover as prices in New York traded to their lowest level since September 2019 while prices in London traded to their lowest level since January 6th. We saw during the 2008 financial crisis that cocoa is not recession proof, as prices fell nearly 30% in London and 40.0% in New York from the highs at that time. We continue to stress that cocoa demand has a strong correlation with gross domestic product growth in both developed and developing nations. As the rate of economic growth falls, cocoa demand will follow. In 2008, the rate of grinds fell by 6.30% according to the ICCO. If the same were to happen for 2019/20, our balance sheet would show a 270kmt surplus for the current year. While we are not projecting a 6.30% decline in grinds for the current year, it is absolutely possible as the current situation is completely unprecedented. Large portions of the labor force across developed nations are being laid off from work as a result of the virus forcing businesses to close. As a result, there is less disposable income, especially for the one commodity that no one truly needs to survive. Federal Reserve Bank of St. Louis President James Bullard predicted that the U.S. unemployment may hit 30.0% in the second quarter with an unprecedented 50.0% drop in gross domestic product. In addition to the demand risks from the consumer, the possibility of a total shutdown continues to grow by the day. If the European governments and U.S. government forced nonessential businesses to close for two weeks, the balance sheet would lose at least 80,000mt of grind. The current environment does not make it easy for the processors who are currently seeing a fall in demand from the consumer and are being forced to carry stocks at an inverse as a result of the living income differential. Just this past week, the National Confectioners Association called on the White House and Congress to establish a recovery fund of $500.0 million.

However, we must also ask what happens if the virus starts to grow in the producing countries. A loss of exports from Ivory Coast and Ghana, where the health systems are nowhere near as advanced as the developed countries, would also be catastrophic to the balance sheet. There is no doubt that the negative effects on the economies of Ghana and Ivory Coast will be substantial. Ghana requested support from the World Bank and International Monetary Fund to mitigate against the economic impact of the coronavirus. It is likely that some help will be received, as the World Bank announced a $12.0 billion package to help poorer countries confront the disease while the IMF announced a rapid credit-facility of $50.0 billion for similar purposes. According to the Minister of Economy and Finance in Ivory Coast, the country’s economy will likely expand at the slowest pace since the end of the crisis in 2011. Economic growth forecasts were cut to 5.80% from an initial estimate of 7.30%. Interestingly, the living income differential is still in place! If the ports remain open with no supply disruptions, the negative impact to demand in addition to higher producer prices will put the cocoa market in structural surplus.

Over the course of the COT week, the U.S. dollar appreciated by 3.28% while the Bloomberg Agricultural Subindex fell by 7.05%. Throughout the remainder of the week, the U.S. dollar appreciated to its highest level since January 2017 – at the time, this was the highest level in the U.S. dollar since March 2003. The macro environment continued its downward spiral this week as coronavirus cases rise exponentially across the world and as businesses are being forced to shut. In the U.S. alone, the labor department reported a 30.0% jump in initial jobless claims on Thursday – Goldman Sachs is forecasting that number to grow to 2.25 million in next week’s report from 281,000. Treasury Secretary Steven Mnuchin told Senators that he believes the economic fallout is potentially worse than the 2008 financial crisis. According to J.P. Morgan Chase, gross domestic product in the U.S. is expected to shrink at an annualized rate of 14.0% in the April-June period while Bank of America and Oxford Economics both see a 12.0% drop - Goldman Sachs is expecting a 24.0% plunge. A flight to safety in dollar denominated assets has helped push the value of the dollar higher, which has also helped weigh on commodity prices. Markets are clearly discounting a sharp fall in the rate of demand for agricultural
products. However, the potential for a supply shock as coronavirus starts to hit less wealthy nations is also a possibility. Volatility is likely to remain high in the near future with the specs mostly in risk-off mode.

The combined net managed money position for New York cocoa fell by a larger than expected 36,254 lots on the week, which makes the spec net long 17,107 lots from the liquidation of 39,321 longs and 3,067 lots of short covering. The same position in London showed 13,448 lots of liquidation to make the spec net long 42,895 lots from the liquidation of 14,054 longs and 606 lots of short covering. Open interest changes since Tuesday and through Thursday indicate that the spec in New York is currently flat while the spec in London is likely net long 38,000 lots. London cocoa is still the longest agricultural commodity on the
board relative to its historical range.

From a technical perspective, prices in New York are oversold with the relative strength index at 18.322 and the lower Bollinger on the weekly chart at $2,289. Prices settled beneath the long-term uptrend support originating on December 29th, 2017 at $2,287 while the momentum indicator continues to point towards further downside. If prices were to retrace, the first level of resistance is at the 23.60% retracement of the move at $2,378. Prices in London held the longterm uptrend support originating on January 26th, 2018 at £1,765 but continue to trade within a well-defined downward sloping channel with support at £1,757 and resistance at £1,843. The momentum indicator is starting to show that the downside is limited but we need to settle above the aforementioned resistance in order to confirm the new trend.



New York Cocoa, Second Position Continuation Chart























London Cocoa, Second Position Continuation Chart









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.