Cocoa Stockpiles Threaten One of the Few Commodity Bull Markets

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While cocoa futures jumped into a bull market this week, there’s a problem for investors betting on more gains: surging stockpiles that are signaling ample supply.

Inventories at warehouses monitored by ICE Futures U.S. rose 3.9 percent on Tuesday to the highest in 10 months, the latest exchange data show. The hoard has expanded more than 60 percent this year as a cooling global economy curbed demand for chocolate.

The fresh evidence of rising supplies led traders to put an end to a three-day rally in New York futures that drove prices into a bull market on Tuesday. While gluts have kept most commodities mired in bear markets this year, cocoa climbed about 11 percent after dry weather threatened crops in Ghana, the world’s second-biggest producer. The harvest in Ivory Coast, the top grower, can help to make up for the output losses.

“There are enough cocoa beans around,” Bill Pearce, a Chicago-based vice president at McKeany-Flavell Co. Inc., said in a telephone interview. “Demand is just not good.”

On ICE, cocoa futures for September delivery slid 0.4 percent to settle at $3,222 a metric ton at 12:05 p.m. in New York. Prices settled at $3,235 on Tuesday, or 21 percent higher than this year’s closing low of $2,677.

The International Cocoa Organization last month cut its outlook for world grindings, a gauge of demand, for the season that ends in September. Bean processing will drop 3.2 percent to 4.16 million tons, the London-based organization said May 29. The slump in Ghana’s production is a “temporary issue,” Jean-Marc Anga, the group’s executive director, said last week.

El Nino

Still, the ICCO is forecasting a global deficit of 38,000 tons this season as production drops. That compares with a surplus of 14,000 tons a year earlier. El Nino, a weather pattern that’s formed because of warm ocean temperatures in the central Pacific, could exacerbate the dry conditions in Ghana and may hamper next season’s crop, according to Speedwell Weather in Charleston, South Carolina. Ivory Coast will hold presidential elections in October, with the potential for political unrest another threat to supply.

While hedge funds are still betting on more price gains, they’ve started to trim those wagers. In the week ended June 9, money managers cut their cocoa net-long position by 2.2 percent to 43,110 futures and options, U.S. government data show. That was a second straight decline.

Rising inventories can help to cushion the market from supply shocks. As of June 16, ICE warehouses held 4.61 million bags, each weighing 145 pounds (66 kilograms). That’s the most since Aug. 7. Stockpiles are heading for a sixth straight monthly gain, which would be the longest streak since May 2013.

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