Cocoa futures are set to rally back past the $3,000-a-tonne level, broker VSA Capital said.
After rising through 2015, cocoa futures entered a sharp sell-off in 2016, with the front-month New York contract down more than 10% since the start of this year.
But VSA said that “the inherent structure of the industry lends itself to a general bullish environment over the coming years”.
“In the shorter-term, increasing El Nino-related concerns over the mid-crop […] in the two largest producers, Ivory Coast and Ghana, could certainly push the US benchmark cocoa price back through $3,000 a tonne, said Ed Hugo, of VSA Capital.
Harmattan threat
Cocoa prospects are under threat from the very strong Harmattan, a dry winter wind which sweeps over West Africa, where most of the world’s cocoa is produced, every year.
The Harmattan poses a particular threat to the mid-crop, which runs from April, and supplies the smaller, non-export grade beans which are used in the domestic grinding industry.
Last week Commerzbank warned that hopes for the Ghanaian crop to recover from its low 2015 levels were fading.
Government sources have been reported to have warned of production at just 750,000 tonnes, barely above last year’s levels and a far cry from the 850,000-900,000 tonnes.
Bullish bets
Data released by the US Commodity Futures Trading Commission on Friday showed that hedge funds increased their net long in cocoa over the week to last Tuesday.
The CFTC data showed that managed money, a proxy for speculators, lifted its net long in cocoa by 1,529 lots to 16,581 lots.
This is the first time speculators have upped bullish bets in cocoa since the middle of December.
London markets ease
True, last week analyst Judith Ganes-Chase noted market scepticism over the apparent rapid deterioration of West African crop prospects.
But VSA Capital said that “although data is often inconsistent in the cocoa sector”, the frequency of bad weather warnings “seem to be elevated at this point”.
March cocoa futures in London were down 0.4% in afternoon deals, at £2,052 a tonne.
New York markets are closed for President’s Day.
United Cacao shares bounce off lows
Meanwhile VSA Capital noted that United Cacao, a Peruvian cocoa grower, has seen two outstanding legal issues decided in its failure.
A previous decision confirming that United Cacao held the correct environmental and zoning permits has been affirmed by a court of appeal.
United Cacao has also resolved proceedings against environmental NGO Rainforest Rescue, which had previously made comments critical to it. The company received monetary compensation and an apology.
“These rulings remove certain overhanging litigation issues,” said VSA Capital, as it reaffirmed a buy recommendation on the company.
“With the company having always been confident of its legal position, we are unsurprised by these rulings in its favour,” VSA added.
Shares in United Cacao bounced 3.2% in afternoon deals in London, at £0.960.
Shares were up from an all-time low of £0.930 last week.
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