Sunday, June 28th, 2020

Cocoa futures finished the week up 1.11% in New York and down 0.12% in London basis the September contracts – the pound/dollar finished the week down 1.88%. It was a turbulent week for the cocoa markets despite the lack of fundamental news. Prices rallied sharply on Thursday and erased all of the day’s gains on Friday, as the gamma related buying due to the July options expiry in London on Tuesday was met with speculative and commercial selling. Many had expected a move higher as a result of the July option expiry, as there is a significant amount of open interest between the £1,900 and £2,100 calls. With only a small amount of origin hedging on the front months, the gamma buying can easily move prices higher. The main risk to the 2020/21 cocoa crop in West Africa has been and still is the weather, which has been good so far. Even though the weather has been good so far, there is still another two months for something to go wrong. The question at this point is if the specs will continue to add shorts or if they will engage on the long side again with the September/December spreads at a premium. September is the last delivery month without the living income differential and will likely stay premium for the foreseeable future. If the specs engage from the long side again, there is no doubt prices will move higher. However, any move higher should be seen as an opportunity to build a short position in the forward contracts. We continue to believe that the cocoa market will experience the largest surplus since 2016/17 in the 2020/21 season as a direct result of high farm prices, good weather, and lackluster demand.

The combined net managed money short position in New York increased by 3,259 lots to be 11,060 lots short from the liquidation of 922 longs and the addition of 2,337 shorts. In London, the net long position fell by 10,378 lots to be 11,967 lots short from the liquidation of 5,568 longs and the addition of 4,810 shorts. The question remains if it is too early to for the spec to build a sizeable short position across both markets at this point in time with still two months of weather risk left and the spot spreads inverted. However, as we mentioned above, any rally is an opportunity to establish a short.

Coronavirus cases across the world passed ten million, with the unofficial total likely significantly higher. Some states, like Florida and Texas, are seeing a significant amount of new cases as a result of opening too early. Any delays to reopening businesses or getting back to ‘normal’ will continue to weigh on chocolate demand.

Total precipitation in Ivory Coast and Ghana over the next two weeks is expected to average 91.33% and 106.50% of normal respectively. Temperatures are once again expected to be in-line with the longterm average at 25.0°C. The weather has not been an issue thus far in the development of the cocoa crop. The ITF weather pattern in West Africa has moved north behind schedule this season, which explains the occurrence of floods on the coast. When the ITF moves north, the cocoa areas in both Ivory Coast and Ghana should receive several weeks of good rain. In addition to the good weather, the Australian Bureau of Meteorology expects a 50.0% chance that La Nina will occur this year. Three models indicate that a La Nina could form by the end of the summer with another two models suggesting that it could occur during Fall. The National Oceanic and Atmospheric Administration (NOAA) in the U.S. is expecting a 40.0% - 50.0% chance of La Nina occurring as well. La Nina is beneficial for the cocoa crop and will only add to the overall bearishness of the forward balance sheet if it occurs.

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.

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