Cocoa Market Shift Afflicts Bulls, Relieves Candy Makers
Investing.com | Aug 09, 2018 02:52
It was the best performing commodity in the first quarter. Now, cocoa might be lucky to remain in the tenth spot the rest of the year after weaker grinding results and confectionery demand cost it its biggest tumble since 2011, suggesting no imminent price hikes, at least in Hershey (NYSE:HSY)’s products.
“The selling over the last couple of weeks has been dramatic,” Jack Scoville at Chicago’s Price Futures Group wrote ahead of the market’s open on Wednesday, stressing “the need for a corrective rally”.
Cocoa futures did rise in the previous session, settling up 0.5% in New York. Scoville’s argument for a bounce came after the market’s 14% drop in July, its most since a 20% plunge in November 2011.
Thanks to a first quarter gain of 32%, the raw material for beverages and candy remains up 10% on the year. But compared to its top ranking for commodity returns in the first quarter, cocoa was now at the ninth spot, a North American grinds by companies including Hershey, Mars, Barry Callebaut (SIX:BARN), Ghirardelli, Nestle (SIX:NESN), ECOM and Cargill, were down about 2% compared to the first half of last year. That, and benign weather for the global cocoa crop, which translates again into more beans than the ground product, gave market bears reason to short.
“Ideas that current weather conditions are good for the next crops continue,” nurturing projections of big yields, said Price Group Futures’ Scoville. “Showers and more seasonal temperatures have been seen in the last few weeks to improve overall production conditions in West Africa. Conditions also appear good in East Africa and Asia.”
Recovery By Year-End?
So, can the market recover?
“Longer term, I think the grinding numbers are going to be supportive,” said Cordier of Optionsellers. “And it could easily range about $100 to $200 more than where it is right now. If not now, we’ll definitely see that happen in the third or fourth quarter.”
ADM Investor Services seems to concur with that view, saying in a recent note that while momentum in cocoa remained bearish, the market was “now at oversold levels and will tend to support reversal action if it occurs”.
Till that happens, candy makers will feel less pressure from raw material costs to alter their prices.
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