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EVENING COCOA REPORT 3/14/2021

Sunday, March 14th, 2021

Cocoa futures finished the week up 0.94% in New York and down 0.51% in London basis the May contracts – the pound/dollar finished the week up 0.60%. Last week was relatively quiet for the cocoa markets, as speculative buying continued to face resistance from commercial sellers. The May/July spread in New York made a new low for the move to $14 discount as a result of the continued stock build. Exchange stocks now total 4,404 lots in New York with an additional 95 lots pending grading. Out of the total numbers of lots available for delivery, 61.0% of the stock are Ivory Coast beans. In order for a delivery of Ivory Coast beans to be economically viable, the cost at which they were purchased would have to be nearly £300 discount FOB Ivory Coast. While it is certainly possible that the beans were purchased at this level or even less, differentials have jumped in recent weeks as the remainder of the mid crop has mostly been sold. In London, gradings have picked up since the start of February and have continued through this month, with 20,770mt graded during the month of February and 33,300mt graded this month so far. Valid stocks have nearly doubled since the end of January while total stocks are up by only 29.64% over the same period. Total destination stocks in the U.S. are increasing in-line with their seasonal pace while total stocks remain historically low in London. With very little trading for the 2021/22 crop as a result of high differentials, there is an economic incentive to stop cocoa beans on both exchanges and carry them forward into next year’s crop year. Even though it is highly likely that forward differentials will eventually collapse as a result of this year’s surplus and what will likely be a surplus next year barring any detrimental weather over the main crop growing season, there may be some appetite to obtain beans for next year if it is currently offered cheaper on the exchange than it is in the physical market. The May/December spread settled at $2 premium in New York and settled at £31 premium in London. When carry costs are factored in, these beans are still cheaper than what Ivory Coast is offering forward differentials at. Of course, the risk here is that the beans you receive in London will not be Ivory Coast beans, which throws off this estimate as it does not compare apples to apples. Procuring beans from Cameroon and Nigeria for December delivery is cheaper in the physical market than it would be to stop the beans on the exchange and carry them forward. Given how low total stocks are, if someone or multiple people were to stop both the March and May contracts, the London market is vulnerable to further upside. The same holds true for New York as well, especially since any stopper can say with a good amount of certainty that they will be receiving Ivory Coast beans.

The question becomes, why stop cocoa beans on the terminal in a surplus year (likely 2021/22 surplus as well) when cash differentials will almost certainly collapse on the forward positions? One obvious reason is that there is always the potential for an unpredictable negative weather event over the summer that could shift the balance sheet into deficit, which would prevent the total price of cocoa from collapsing. Another potential reason that we believe should be factored in as well are the logistical issues in the global supply chain. Demand for various different products has accelerated since the start of the pandemic and factories in other industries have issues bringing enough raw materials to their factory in time to meet the growing demand. Cocoa demand correlates well to gross domestic product and even though shifts in demand do not occur overnight, underlying demand for chocolate has started to accelerate over the past two quarters. With the surplus still at origin, total destination stocks relatively low, and physical offers for Ivory Coast and Ghana beans still way too high for 2021/22, stopping beans on the exchange offers a way to help eliminate some of this risk. The stimulus bill in the U.S. in addition to the rapid speed of vaccinations is expected to result in an economic boom for the country’s economy. Even though vaccinations in Europe are lagging the U.S., the pandemic may still come to an end faster than expected. Once people are allowed to travel again, even if it’s only between a select few countries or only within the E.U / U.S., everyone will be leaving their homes one way or another. With the savings rate having skyrocketed, people will be ready to spend money, some of which will surely be on chocolate. At the end of the day, the cocoa market is in surplus and has the potential to be in surplus for 2021/22 as well even if demand rebounds. There is no certainty that there will be any supply chain issues to meet demand or that someone will stop beans on the exchange. We simply believe the market is vulnerable at this point in time.


Cocoa volatility has been trending lower across both markets, as the surplus for the current year has prevented any major break to the upside or downside in the shortterm. Given the aforementioned risks to the market, we believe it is better to own volatility rather than to be short.

The combined net managed money long position in New York increased by 5,366 lots to be 34,937 lots long from the addition of 4,128 longs and 1,238 lots of short covering. In London, the same position increased by 6,055 lots to be 35,363 lots long from the addition of 5,634 longs and 421 lots of short covering. The combined spec position (New York + London) reached its highest level since the March 10th, 2020 report, as the spec added fresh length across both markets. Despite the increase in the spec position, New York and London cocoa continue to be the top two shortest agricultural commodities relative to their historical range.

As always, thank you for reading. Please feel free to reach out with any questions.

Best Regards,

Eric Bergman Vice President JSG Commodities203.853.3000 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. Under no circumstances may this report be forwarded without prior approval.

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