(News Bulletin 247) – Futures contracts plunged on Monday in both London and New York. Technical factors and slightly encouraging weather conditions explain this crash.

The recent surge in cocoa prices, which went from a little over $3,000 per tonne to over $12,100 in the space of a year, was bound to risk causing at one point or another a severe correction.

This is what happened on Monday both in New York and in London. The May futures contract on a tonne of cocoa fell by 15% on the British market and that of July in New York plunged by 14.7%, according to data from investing.com. Compared to its peak reached on April 19, cocoa fell by more than 25%, which constitutes a correction phase (when an asset loses more than 20% compared to its previous peak).

Bloomberg cites technical factors to explain, in part, this fall. The agency explains that the stock exchange operator ICE has, in London, raised the collateral requirements several times – to simplify the money put as guarantee of a long position – required to bet on cocoa futures.

With this increasingly high cash required for deposits, some investors who have positioned themselves in cocoa no longer have the means to put back into the pot to guarantee their positions, which forces their exit.

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More encouraging weather

The number of contracts, and therefore volumes, is also decreasing, which causes an accelerating effect of the decline.

The increase in margin requirements for trades and the sharp reduction in the number of outstanding contracts “open more space for trend reversals, with fewer players able to cause sharper moves” , Leonardo Rossetti, an analyst at StoneX, told Bloomberg.

The agency also mentions, at the fundamental level, the rains occurring in West Africa, where the main producing countries are concentrated (Ivory Coast and Ghana), and which could benefit mid-season harvests.

This wetter weather obviously does not resolve the supply tensions which have driven up cocoa prices over the past year. But it gives the market reason to decline while information likely to prolong the surge in prices has been missing in recent months.

“West Africa has started to see a little more rainfall, which has eased fears about harvests. (…) The shift to wetter weather in West African growing areas could be beneficial to future production in the region in the medium term,” confirms the XTB platform. “It should be kept in mind, however, that current weather conditions need to persist for an extended period of time to actually change harvest forecasts,” she adds.

A short-term decline?

This respite could therefore be short-lived. “If the rapid increase (in prices, Editor’s note) observed in the first quarter has slowed down, concerns about the reduction in harvests in West Africa, one of the main suppliers of ingredients for chocolate, persist” a explained Gaëtan Heu of Saxo Bank on Friday.

“Adverse weather conditions, aging trees and crop diseases in Ghana and Ivory Coast have caused cocoa prices to more than double over the past year. Production is expected to be lower than consumption for the third consecutive season, which suggests a long-term decline in cocoa production in the region,” continued the specialist.

“To complicate matters, a widespread virus threatens the health of cocoa trees, particularly in Ghana, where cocoa swollen shoot virus disease (CSSVD), carried by mealybugs, has caused crop losses ranging from 15% to 50%,” he adds.