ICE Cocoa-Rule Shift Widens May-July Spread to Most in 8 Months

A rule change by ICE Futures U.S. is raising the cost of cocoa deliveries to exchange warehouses and widened the discount of May futures to an eight-month high compared with the July contract, according to Newedge Group.

In a bid to boost the quality of certified stockpiles, the New York exchange will impose a penalty for bean counts that exceed a specified amount per kilogram, starting with the July contract. While ICE announced the change in June 2011, a reminder notice issued March 13 sent the price spread between the May and June contracts up 40 percent over three days.

“This will make it more expensive to deliver,” Joe Mallaney, a senior director of soft commodities at Newedge Group, said in a telephone interview from New York. “That’s why the May-July spread widened. Stockholders have an incentive to deliver in May as they will be using the previous fixed formula. Come July, the percentage discount will be bigger at current price levels.”

Cocoa futures for May delivery dropped 0.7 percent to settle at $2,115 a metric ton in New York, while the July contract dropped to $2,129. The discount on May futures was $14, the most since July 16 and wider than $10 on March 12.

The current rule specifies a maximum penalty of $72 a ton for bean counts above the standard. The new rule will impose a maximum penalty of 4 percent of the value, so the current July contract would carry a penalty of $85.16. The standard bean counts ranges from 1,000 to 1,200 per kilogram. Bigger beans tend to yield more of the cocoa liquor, butter and powder used in foods including chocolate.

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