Sunday, July 26th , 2020

Cocoa futures finished the week up 2.96% in New York and down 0.19% in London basis the September contracts – the pound/dollar finished the week up 1.80%. Prices recovered slightly in New York and remained unchanged in London mostly as a result of prices having been technically oversold and the spec selling starting to run into industry support. We’ve been mentioning for the past few weeks that despite the bearish fundamental outlook, we don’t recommend chasing prices lower in the short-term. There are still risks to the 2020/21 balance sheet that can positively impact prices in the short-term. These risks mostly include political uncertainty due to the elections in West Africa, uncertainty over the weather next month, and the potential for a spread inversion that would lead short specs to cover. With that being said, we maintain our bearish fundamental outlook for the 2020/21 season and if the market were to rally, we will be recommending a short. The window for something to negatively impact the 2020/21 crop grows smaller by the day.

Over the past week, the market received some more information on the demand side of the balance sheet, with both Lindt and Hershey reporting their second quarter results. The results were as bad as we expected. Lindt expects a slow recovery in sales from the impact of the pandemic before they bounce back next year. Even though the company confirmed its mid-term guidance for 5.0-7.0% organic sales growth, the guidance is based on a few different factors that we find unlikely to occur. According to the company’s press release, the most important assumptions for their 2020 forecast are that there are no major second COVID-19 waves that require further widespread lockdowns, the majority of retail stores remain open from now until the end of the year, the holiday season business comes in at around 2019 levels, and travel retail gradually starts to gain some traction. While no one can accurately predict how bad the second wave of COVID-19 will be, these factors required to maintain their sales target leave almost no room for error. For the first half of 2020, sales in Europe, North America, and the rest of the world fell by 4.90%, 8.20%, and 18.40% respectively. When asked about the full year sales guidance, the CFO of Lindt said “our best case right now…so for Europe for the full year, somewhere between minus 3.0% and minus 6.0%. For North America, somewhere between minus 5.0% and minus 8.0%. For the rest of the world, somewhere between minus 14.0% and minus 18.0%.”

The Hershey report was similar to what we saw with Lindt. Volume was a seven-point headwind to the company’s earnings, driven by both COVID-19 pressures and price elasticity in North America. Volume in North America was a 3.80- point headwind to earnings while it was a 31.30-point headwind for their international segment. Market share gains were massive for Hershey in the second quarter, having grown by 225 basis points in the second quarter – sales increases should be taken with a grain of salt as it pertains to the global demand for cocoa. Sales for baking items have performed exceptionally well, with growth of over 40.0% in the second quarter (mostly items that use cocoa powder). While they are expecting Halloween sales to be ‘ok’ this year, the company is not providing new 2020 fiscal guidance. Hershey said that “while the company’s performance improved over the course of the second quarter, the impact of recent spikes in coronavirus cases on consumer mobility, retail operations, governmental regulations and the macroeconomic environment remains unclear.” The company also states that “the recovery mode is going to be a slow uptick,” especially for non-measured channels like retail, foodservice, air travel, and world travel retail. E-commerce has been a growth spot for the company but it still only represents a fraction of their total sales (~3.0%).

Both Lindt and Hershey reported results that the market mostly expected to see, which was a decline in sales with expectations for a rebound in 2021. However, we found it interesting that neither company took time to mention the negative effects on the rate of demand that were occurring before the pandemic started. Not only will the living income differential negatively impact demand for cocoa but also slowing economic growth across the world. Chocolate demand is closely correlated to gross domestic product growth in almost every major consuming nation. Even if we start to see a recovery due to quarantines being lifted, high prices and high unemployment will be another two factors that continue to negatively impact demand in the 2020/21 year. Equity markets have staged a V-shaped recovery so far but the underlying economy has not. Both companies were especially careful to reiterate their disclaimer statements that forward-looking predictions may not be accurate. COVID will continue to remain a wildcard for the cocoa market. Has the market seen the worst or is the worst yet to come? Only time will tell. One potential positive factor that may benefit growth in demand is the extra stimulus being released to the citizens of the European Union and potentially to the U.S. again. Studies have shown that seven out of ten people that receive unemployment benefits in the U.S. are actually receiving more money than they were before the pandemic started.

Ivory Coast reportedly wants to do more negotiated deals to take advantage of prices when they rise as opposed to having to sell the majority of their cocoa forward. The announcement, which quotes the country’s agricultural minister, should be taken as a confirmation that the country is undersold for the 2020/21 year. In regards to the country’s election, the governing party has asked President Alassane Ouattara to seek a third term. Ouattara is getting old at 78 (my apologies to anyone reading this that thinks 78 is the new 60) but his re-election would certainly calm nerves about the potential for an uprising.

Precipitation in Ivory Coast and Ghana over the next two weeks is expected to average 91.0% of normal and 73.50% of normal respectively. The actual total amount of rain received in Ivory Coast and Ghana is expected to average 39.0mm and 29.50mm respectively, which is about half of what Ivory Coast received during the same period last year and about twice as much as what was received during the same period in 2016. Monitoring the weather for the remainder of August will be the most significant market factor in the coming weeks.

The combined net managed money short position in New York increased by only 112 lots to be net short 28,189 lots from the addition of 818 new longs and the addition of 930 new shorts. New York cocoa is now the shortest agricultural commodity on the board relative to its historical range. In London, the same position increased by 6,470 lots to be 17,578 lots short from the liquidation of 1,313 longs and the addition of 5,157 shorts.

From a technical perspective, prices in New York have been forming a rising wedge and trading within an upward sloping channel that gives support at $2,188 and resistance at $2,262 basis the second position continuation contract. Prices failed to settle above the 38.20% retracement of the move from the high on June 1st to the low on July 8th at $2,238. In London, prices have been trading in a downward sloping channel since the week of May 15th, with resistance at £1,580 and support at £1,439. 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.