Cocoa's star bright after stellar 2008

LONDON (Reuters) - Savvy investors should have piled into cocoa in 2008: with gains of 71 percent in London it was the best performer among the major financial markets, and could outperform again in 2009 because of worries over supply.

Cocoa futures have put in a commanding performance this year, outperforming other asset classes as the global economy switched from boom to bust.

"Cocoa has good fundamentals -- sell it at your peril," said Lars Steffensen, managing director of London-based commodities fund Ebullio Capital Management.

Traders say global cocoa supplies are looking tight, while demand is holding up well, a story unlike that of other raw materials such as oil and industrial metals, whose prices slumped as economic growth fizzled.

Since the end of 2007, London cocoa futures have surged 71 percent and U.S. cocoa has risen by 31 percent; while crude oil plunged 59 percent, copper dropped 56 percent, and U.S. wheat fell 36 percent.

The Reuters-Jeffries commodities index, a global commodities benchmark heavily weighted to oil, has fallen by 40 percent since the last trading day of 2007.

Cocoa's stellar performance is primarily due to its bullish market fundamentals -- a shortage of beans emerging from top West African producers, notably Ivory Coast and Ghana.

"In Ghana such a serious situation had not been expected," said Laurent Pipitone, senior statistician at the London-based International Cocoa Organization (ICCO). "In Ivory Coast, we'll have less supply in the main crop than last year."

SLUMP IN POUND

Another key reason for London cocoa's strong rally this year, outpacing U.S. cocoa futures, is the sharp drop in the pound as economic conditions in the UK deteriorated and interest rates fell sharply to fend off a slump.

Unlike most commodities which are denominated in dollars, London cocoa futures are based in sterling.

The slide in the pound triggered arbitrage between the U.S. and London markets as investors holding alternative currencies were able to buy sterling-based contracts more cheaply.

"(The weak pound) is the reason why the London market is rising more than New York," Pipitone said.

If the supply outlook remains tight, London cocoa futures, which hit a 23-year peak on Tuesday, could rise further in 2009, analysts and traders said.

"The fundamentals would probably still point to the upside (in price) over the next two or three months," one dealer said.

Some traders are talking privately of the possibility that London cocoa futures could soon touch 2,000 pounds per tonne.

Many analysts expect the pound to fall further as the Bank of England could trim rates toward zero next year.

Second-month London cocoa futures closed 66 pounds or 3.8 percent higher on Tuesday at 1,818 pounds a tonne after hitting a 23-year high of 1,820 pounds.

U.S. March cocoa was up $108 or 4.2 percent to $2,670 per tonne.

Asked to give a medium term view on cocoa, Steffensen said, "There's a good chance that in New York it could go for $3,000."

The market fundamentals in cocoa are much more constructive than for other commodities as opinion shifts to expectations of a global deficit.

Investment bank Fortis on Monday revised its global supply/balance forecast for 2008/09 to a 45,000 tonnes deficit from a surplus of 21,000 tonnes, which would be the third successive season of deficit. The revision reflected a cut in forecast production in Africa.

Some cocoa traders privately said they believed Fortis's deficit forecast was too modest and that the shortfall could be substantially more.

"The medium term outlook is friendly but we do think the market is over-bought," one London cocoa dealer said, noting risks of a sell-off to take profits from the highs.

Bean arrivals at the ports in Ivory Coast, the world's top cocoa producer, are sharply down this year, due to higher than normal rainfall, which slowed pod maturing considerably.

Pipitone said above-average rainfall in West African cocoa-growing regions between July and September had increased the incidence of black pod disease, reducing bean supplies.

The financial crisis has also had an impact - those involved in the cocoa trade found credit much more difficult to obtain.

Political upheaval in Ivory Coast added to the bullish view, due to fears that cocoa supplies would be constrained.

"All Ivory Coast citizens continue to live amidst considerable political uncertainty, governed in an arbitrary and ubiquitously corrupt fashion," Fortis said.

"In macro-economic terms the country is bankrupt."

(Reporting by David Brough; editing by Peter Blackburn)