Funds Lose Their Taste For Chocolate
Today’s Spotlight Market
Cocoa futures seemed to have stabilized for the moment, after plummeting to start off the year. Traders seemed to have lost patience with the market due to the lack of news coming out of West Africa. Traders had been sold on the idea of a large deficit for the upcoming crop, but it will be some time before any solid figures will be released for traders to digest. The long liquidation by hedge funds, which lightened their net positions to the tune of 22,000 contracts, had more to do with managing risk and not wanting to wait on demand figures rather than a shift in production outlook. ?
Fundamentals
While it will be some time before hard data is released, the likelihood of crop damage is relatively high due to the hot, dry Harmattan winds. The dusty, dry winds are a normal occurrence this time of year and can destroy small Cocoa pods and reduce soil moisture, leading to underdeveloped beans. Harmattan winds seldom get as intense as this season?s winds have been to this point and there is significant chatter among farmers in the Ivory Coast that suggest the damage could be enormous. While the supply news looks as though it may be shaping up to be bullish, there are now questions about demand. China has been a growth market for fine chocolates, which have a high concentration of Cocoa. With Chinese economic data continuing to look grim, there is concern that there will be a slowdown for demand not only in China, but from the rest of the world. Last week?s Cocoa grindings in Europe were extremely strong. The European cocoa grind rose 6.0% in the last three months of 2015.
Technical Notes? -? View Today’s Chart
Turning to the chart, we see the March Cocoa contract breaking through support near the 3040 level. The next support level can be found near the 2800 level. The RSI has recovered from oversold levels due to the price stability over the past several sessions, but remains near oversold. Prices will likely have to cross back above the 3040 level in order to regain some momentum. On the downside, the 2800 level can be seen as critical support. Failure to hold there could result in heavy bearish pressure.
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