Q+A What's going on in the London cocoa market?

LONDON, July 29 (Reuters) - NYSE Liffe's (NYX.N) July cocoa futures contract saw the largest delivery in 14 years earlier this month. Sources familiar with the matter say commodities firm Armajaro is now holding the bulk of the available graded cocoa stocks, fuelling fears of a supply crunch in September.

The following looks at the implications of the delivery:

WHAT DOES IT MEAN FOR CHOCOLATE MANUFACTURERS? Armajaro sells to many of the leading cocoa processors. However, mid- to small-sized processors who do not have a relationship with Armajaro may find it difficult to source cocoa while the trade house is holding vast quantities. European trade and industry sources told Reuters that Switzerland's Barry Callebaut (BARN.S), the world's largest chocolate maker, was the end user of about 100,000 tonnes of cocoa that was delivered on the July contract. [ID:nLDE66I1SI]

WILL THE PRICE OF CHOCOLATE BARS RISE?

Cocoa makes up only a small portion of ingredients in most chocolate products so higher cocoa prices don't necessarily translate into higher chocolate prices. If high prices are sustained however, manufacturers may decide to make price increases, or reduce bar sizes and substitute cheaper ingredients where possible. A recent Reuters poll showed market participants believe Liffe cocoa futures prices will remain near 32-year highs at least until the end of 2010. [ID:nLDE66K1CC]

WHAT ARE THE REGULATORS SAYING?

There are no rules in the London market against taking a large delivery. Dealers said the more heavily regulated New York Intercontinental Exchange (ICE.N) cocoa market would require evidence of off-take sales contracts from anyone wishing to take a large delivery of cocoa like the one on the London market earlier this month.

A letter complaining of excessive speculation in the London market from 16 market participants to the Liffe exchange, threatening to shift their business to ICE, triggered a meeting between Liffe and those concerned earlier this week.

The UK's financial markets regulator the Financial Services Authority also received a copy of the letter.

Dealers said it was unlikely those needing to hedge good quality West African cocoa would move to the ICE market due to the lower quality specifications on that market.

Following the meeting Liffe said it will consult with customers and its regulator on further potential changes to the cocoa market. [ID:nLDE66Q1HQ]

Dealers said they expect position limits to be a topic of these discussions. The rival Intercontinental Exchange already has position limits.

Liffe has said that there was no evidence of abusive trading behaviour in the July contract and it intends to introduce a commitment of traders report in the third quarter of 2010. [ID:nLDE66J23N]

WILL WEST AFRICA SHIP MORE BEANS IN RESPONSE TO HIGH PRICES?

There's typically a shortage of fresh cocoa available in the lead-up to the main crop harvest in West Africa, the world's largest cocoa-producing region, which begins in September/October.

Poor quality is capping the amount of cocoa being exported from Ivory Coast's mid-crop after heavy rains in recent weeks have caused cocoa trees to sprout plenty of pods but have made it difficult for farmers to properly dry out the ripe beans.

A long-term decline in production in Ivory Coast, the world's number one producer where war and a lack of investment have taken a toll on the industry, has helped to underpin cocoa's strong performance over the past year. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Take a Look on concerns over Liffe cocoa market: [ID:nLDE66B1VS] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

(Reporting by Sarah McFarlane; Editing by Camila Reed)