Sunday, March 21st, 2021

Cocoa futures finished the week down 3.0% in New York and down 1.87% in London basis the May contracts – the pound/dollar finished the week down 0.37%. After prices ran into resistance on the recent rally, the upside momentum has finally stalled, which led to the spec liquidating some of their long position into much needed industry buying. Last week, the March delivery in London resulted in 52,860mt of cocoa being tendered, with the greater majority of the cocoa being purchased through SocGen and Citigroup. Total stocks in London will be interesting to watch in the coming weeks to see if any of the receivers plan to actually use the cocoa or if the longs will continue to acquire more beans. We wrote in last weeks report that the market, especially in London, is artificially tight due to low stocks in a surplus environment. With forward cash differentials still offered at high levels, we continue to believe that there is an economic incentive to receive cocoa on the exchange and carry the stock forward into next year. While forward cash differentials will more than likely fall from current levels as West Africa is substantially undersold for the 2021/22 crop in a surplus environment, there are still plenty of risks to the 2021/22 balance that cannot be ignored. Demand has been improving for chocolate products as a result of lower prices in Europe, stimulus in the U.S., and the inevitable end of Covid that already has led to a surge in people traveling in the U.S. There is also weather risk for the summer months that could easily put the 2021/22 balance sheet into deficit. Not only does the market face the aforementioned risks but it also faces macro risk from a bullish commodity sector and logistical risk as containers become more difficult to find and as shipping prices continue to increase. Processing margins have improved since the start of the year as a result of increasing powder ratios and a fire sale from Ivory Coast on their cocoa beans two months ago. Falling differentials offset the need for futures to decline into what is normally considered bear market territory and we believe that the speculative liquidation will be met with strong commercial buying on the way down. With limited origin selling left for the May and July contracts, there are upside risks to the cocoa market that can no longer be ignored or brushed off due to this year’s surplus. Even though West Africa is undersold, it is impossible to tell when they will start to pick up the pace of their sales. The back and forth over the living income differential will continue for now and there is no reason for West Africa to completely capitulate on 2021/22 sales to get back on par with their normal pace. Maybe they think they will get lucky from some bad weather over the summer since an increase in demand is not enough in and of itself to bring the market into deficit. If they try their luck and weather is good over the summer, we expect prices to fall substantially as West Africa will be forced to sell the market lower. For the time being, we don’t believe they are in any rush.

July At-The-Money volatility finished at 25.73% in New York and at 23.19% in London, both of which are cheap relative to the past two years. Given the current risks to the forward balance sheet and lack of origin selling in the nearby contracts, we prefer to be long volatility at current levels than short.

The combined net managed money long position in New York fell by 109 lots to be 34,828 lots long from the liquidation of 977 longs and 868 lots of short covering. In London, the same position increased by 832 lots to be 36,195 lots long from the addition of 596 longs and 236 lots of short covering. Once again, New York and London cocoa continue to be the top two shortest agricultural commodities on the board relative to their historical range. Despite the larger sell-off over the past three weeks, the combined net managed money position (New York + London) increased by 723 lots to be 71,023 lots long, which is the longest position since the March 13th, 2020 report.

From a technical perspective, prices in New York found support at the 61.80% retracement of the move from the low on February 17th to the high on March 3rd at $2,484 basis the second position continuation chart. The aforementioned retracement is the next major level of support while the next level of resistance is at the downtrend originating off the recent high at $2,539. In London, prices also found support at the 61.80% retracement of the move from the low on February 19th to the high on March 3rd at £1,703. The 61.80% retracement will continue to be the next level of support while the next major level of support after that is at the long-term uptrend originating off the low on July 16th, 2020 at £1,655. 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. Under no circumstances may this report be forwarded without prior approval.

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