Growing expectations of a fresh La Nina questioned a prop for cocoa prices even as data showed speculators have already sold down heavily in the bean, putting it close to joining coffee and wheat on the list of crops on which they have net short positions.
Analysis of regulatory data showed that managed funds – taken by many analysts a proxy for speculators by many analyst – cut their net long position in cocoa futures and options for a third successive week in the week to August 2.
"Cocoa cut its net long position in half to 6,299 contracts," Standard Chartered analyst Koun-Ken Lee said, noting that it was a week in which speculators cut net long exposure – that is, the balance of long positions, which gain when commodity prices rise, to short positions which gain when prices fall – in most raw materials.
Soybeans suffered a particular decline in speculators’ net long interest, with a dip of 13,665 lots to some 111,400 contracts.
Managed money expanded its net short position in coffee by nearly 1,000 contracts to 1,900 lots, the lowest in more than a year, and in wheat by 1,700 contracts close to 11,900 lots.
‘Larger surplus than previously expected’
The drop in cocoa interest comes amid a continuing uplift in production hopes, notably for Ghana, the second-ranked producer, where Tony Fofie, the head of cocoa industry regulator, Cocobod, last week trumpeted a 60% jump to 1m tonnes in the country’s output this season.
Even making an allowance for the supplies smuggled over from Ivory Coast, which are seen inflating the Cocobod data, hopes for cocoa are rising.
"In particular, the International Cocoa Organization has announced that it would raise its 2010-11 Ivory Coast and Ghana production forecasts in August," Goldman Sachs analysts noted on Monday.
"This will translate into a larger 2010-11 surplus than previously expected and has helped offset concerns of poor quality beans arrival in Ivory Coast ports."
The upgrades "will push prices lower to $2,700 a tonne" on the three- and six-month horizons, the bank added.
The bank added that it was more sanguine over long-term prospects, noting that in Ivory Coast, the top producing country, "aging orchards, poor infrastructure and political instability have curbed production and investment over the past few years".
Furthermore, after the passing of the latest La Nina weather pattern – which, while spelling setbacks for most crops, helps cocoa output by bringing regular rains to East Africa – "a return to neutral weather conditions suggests that 2011-12 production will not be as large as the current crop".
"As a result, we see risks that the 2011-12 global balance returns to a deficit and see upside risk to our 12-month price forecasts of $2,700 a tonne," Goldman said.
However, fears are growing that the La Nina may make a comeback, with Commodity Weather Group – which last week made headlines with a lowball estimate of 150 bushels an acre for US corn this year – believing that the odds are on the weather pattern returning in 2011-12.
The US National Weather Service said last week that some computer models "predict La Nina to redevelop during the fall", and flagged the "historical tendency for significant wintertime La Nina episodes to be followed by relatively weaker La Nina episodes the following winter".