⏫ Cocoa gains more than 5%

Weather remains the main cause for strong price rebound this week 🔎

Although nominally we see that the price of cocoa has dropped this week, it's important to remember that there was a massive rolling over of cocoa contracts at about $1500 per contract this week. This was probably the largest backwardation in history (spot price higher than the future price).

The increases in the cocoa market are primarily explained by the lack of defaults in West African countries, which again casts doubt on the harvests in the proper season starting in October. Moreover, data on deliveries still show about 30% lower deliveries to ports than last year. However, the likely cause of the price increases is the rolling of future contracts, which has been ongoing for some time. Low liquidity in the market means that the price effect is simply large and noticeable. Investors who sold the September contract and want to avoid delivery (they do not have access to the beans, and there is no possibility of financial settlement) must buy future contracts to close the position. Due to the fact that there are very few contracts on the market, the demand from those selling contracts could have been very large. Hence about a 20% increase in prices this week. At this moment, there is more liquidity on the December contract than on the September one (although its expiration is still some time away). If the upcoming COT data shows an increase in long positions by speculators, we will have confirmation that the rise in cocoa prices was short-term and related to rolling.

It's worth noting that in the previous two rollings, the price rebounded by about $1500-2000 per contract within the next two weeks after rolling. If this were to repeat, then the price might reach the closing levels of August 7th, near the 38.2% Fibonacci retracement and the descending trend line. Yesterday, despite initial declines, today the price rebounded and the support level at $7000 was maintained.

Source: xStation 5