CORRECTED-ICE cocoa open interest soars to record as speculators pile in

Wed May 8, 2013 8:49am EDT

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(Corrects first bullet point to net long from net short)

* Speculators hold biggest net long cocoa position in nearly 5 years

* Cocoa futures open interest at record 221,328 lots

By Marcy Nicholson

NEW YORK, May 7 (Reuters) - Speculators are on a cocoa buying frenzy, pushing open interest in U.S. futures to record highs on chart-based buy signals and hope that improving global economic conditions will revive demand, dealers said.

The rapid rise in open interest, which reflects the number of outstanding contracts in the benchmark ICE Futures contract, suggests that the latest 19 percent rally in prices since March has been fueled largely by bullish speculators taking new long positions, rather than by bearish players covering shorts.

There's only one problem: Many of the market's veterans see little cause for upbeat sentiment and expect the market to soon correct lower. Supplies from the top grower Ivory Coast are shipping regularly, weather risks have abated, and Ivory Coast and No. 2 grower Ghana have been seen selling regularly in the market.

Some say cocoa may simply be garnering new attention by the process of elimination - other commodities, many of which slumped through April, look even less appealing.

"We don't see the bullish arguments compelling at the moment, but cocoa has a story and these days the specs don't have too many commodities with a potentially bullish story," said Peter G. Johnson, president of trade house and processor Transmar Group in Morristown, N.J.

"Such a fast build-up would suggest a radically bullish and sudden change in the fundamentals, which we don't see," said Johnson.

Johnson said this gives rise to "an enhanced risk of a market correction".

Total ICE cocoa futures open interest rose to 221,328 contracts on May 6, a record high with a notional value of $530 million based on current outright prices. That open interest is up nearly 12 percent from a month ago and 24 percent from a year ago, exchange data showed on Tuesday. Graphic: link.reuters.com/hyp87t

The rise in positions continued even as prices started to pull back from their highest since last December.

There is little doubt that the run-up in open interest stems largely from big hedge funds and other speculative investors rather than hedgers or merchants. Meanwhile the commercials have been adding to their net short position for six weeks, bringing it to the biggest since December at more than 71,000 lots, U.S. Commodity Futures Trading Commission data showed.

CFTC data showed on Friday that "non-commercial" speculators boosted their net long position in ICE cocoa futures and options to the biggest in nearly five years at nearly 32,000 contracts in the week ended April 30.

Commercial firms have been "selling like hot cakes" to speculators, who may be betting that an upturn in the European economy stirs demand for cocoa butter, says Shawn Hackett, president of Hackett Financial Advisors in Boynton Beach, Florida.

"I believe the specs are betting that improved sentiment in European economic growth will break lose some pent-up demand for cocoa butter," Hackett said.

This combination of a large net long position by speculators and large net short position by commercials could be setting the market up for a violent fall by as early as mid-June, as such extreme conditions rarely last more than 40 to 45 days, Hackett said.

"Speculators don't do anything calmly. I would expect a violent setback when it does occur in cocoa," Hackett said, noting this is pending any unforeseen event such as a detrimental turn in crop weather.

The benchmark July cocoa futures contract on ICE climbed to a 4-1/2-month high at $2,437 per tonne on May 3, up nearly 20 percent from two months ago from a nine-month low at $2,034 per tonne.

The market has since eased off last week's peak and closed down 0.2 percent at $2,396 on Tuesday.

To be sure, even the bears see some reasons for gains: a high mid-crop minimum price set by the Ivory Coast may restrict supply in late summer; dry weather there may have damaged the crop; both Ivory Coast and Ghana are believed to have already sold a significant portion of their crops.

Some debate that the fundamental argument is just a rationalization of technically driven trades after prices broke through the 200-day moving average for the first time this year, and then soared above the 50 percent Fibonacci retracement.

"I really think it is all technical based buying, there is no supply-side issue," said one trader. "I think the top is in and I am looking for the market to trade to $2,300-$2,250." (Editing by Jonathan Leff and James Dalgleish)

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