* Speculators hold biggest net short cocoa position in
nearly 5 years
* Cocoa futures open interest at record 221,328 lots
By Marcy Nicholson
NEW YORK, May 7 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
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 said this gives rise to "an enhanced risk of a
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.
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,
"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
"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."