* Front-month premium at highest level since 2010
* Liffe certified cocoa stocks at lowest level since 2003
By Sarah McFarlane and Nigel Hunt
LONDON, Dec 7 The premium of the spot cocoa contract on NYSE Liffe has surged to a more than two-year high just days before it expires, raising questions whether new exchange rules to curb speculation and prevent artificial supply crunches are effective.
The price difference between the contract for December delivery and the March contract widened to 74 pounds ($120) on Friday from 5 pounds a week ago, reaching a high over 80 pounds on Thursday.
Traders say it could go even wider because exchange-certified stocks are at their lowest level since 2003.
Further complicating the picture, one trading house, Olam International, is holding most of the available certified stock and may take delivery of more cocoa when the December contract expires next Wednesday, traders say.
The December cocoa contract is the first to be affected by the new rules, which the exchange introduced ahead of expected European market regulation to curb speculation.
They include a 7,500-lot limit on long positions in a delivery month, which is equivalent to 75,000 tonnes of cocoa.
But that rule may not help prevent a delivery crunch in this case, because available exchange-certified cocoa stocks amount to only 49,170 tonnes, far below the new limit on a single position.
In addition, open interest on the December contract, equivalent to 175,340 tonnes, is far in excess of the small supply of certified cocoa beans.
Olam declined to comment on the amount of the certified stocks it holds or whether it intends to take delivery of cocoa from the December contract.
The company has been bullish on the cocoa market, forecasting a 2012/13 world deficit in excess of 150,000 tonnes.
FAILING THE GRADE
Stocks are low due largely to the failure of some 1,000-tonne, bulk deliveries of cocoa submitted to the exchange for grading as well as to a slower-than-expected flow of cocoa from top global producers Ivory Coast and Ghana in the initial weeks of the 2012/13 season.
"You've got concerns of depleted valid Liffe stocks (and) a higher proportion of cocoa failing and being put up for re-grading, but time is running out," a London-based broker said.
"It does now come down to available cocoa (for grading) and certified stocks."
The last time the spot premium soared on the front-month contract was in July 2010. Cocoa trader Armajaro took delivery of almost all the certified cocoa stock available for that contract, even after some market participants had complained to the exchange about speculation and lack of transparency in the market.
Asked whether it was concerned about the relatively high level of open interest on the December contract, Liffe said in an emailed statement, "As with any contract nearing expiry, the exchange is in regular contact with large position holders and all positions are closely monitored."
Delivery limits are only part of Liffe's oversight of positions, it said.
"In the event that the exchange determined that any given position was not in the best interests of the market, it is within its powers to instruct the member to reduce such position."
Time is running out for more cocoa supplies to be submitted for exchange grading before the contract expires.
"This market is at such a premium people could request the (exchange) grading room to work at the weekend," a London-based dealer said.
The exchange said as of late Thursday, however, it had not received any requests from members to open grading rooms over the weekend and planned to continue grading cocoa on a business as usual basis.