London, 14 July 2010

Following two days of exceptionally high turnover in front-month Liffe cocoa futures, the number of contracts outstanding for delivery has been cut by almost 40% from 49,000 on July 7 to just 29,000 yesterday (equivalent to 290,000 tonnes of physical cocoa).

Turnover hit 13,500 contracts on July 8, putting volume in the 96th percentile for all trading days since the start of 2005. After a lull on July 9, it hit an ever bigger peak of 18,300 contracts yesterday, putting it close to the 99th percentile of the distribution. Both days saw a large chunk of the remaining contracts for delivery closed out.

Market participants have left it unusually late to close contracts for July delivery, amid an acrimonious standoff between buyers and sellers, and criticism from European processors about exchange regulation.

Open interest has remained well above normal in the run up to expiry (Download Chart 1 below). Large closures on July 8 and July 12 have brought it down to more manageable levels, but it is still almost 17,000 lots above average with only two days left to go prior to expiry. Only twice in the last eight years has open interest remained so high at this stage (Jul 2008 and Dec 2007).

The casual observer might have expected such heavy turnover and liquidation to be accompanied by significant price changes - either in the outright price for the July contract or in the spread between the July contract and the next-todeliver September contract . In fact, there is some evidence the July-September spread began to widen from late June onwards when it became clear that far more contracts were remaining open than usual (Chart 2). Outright prices had begun to strengthen about a week earlier, though the link is less obvious (Chart 3).

But in the last week, large reductions in open interest have occurred while outrights and spreads have lain undisturbed. It remains unclear whether the longs decided the time has come to book profits rather than risk delivery; if the shorts simply ran out of time and capitulated; or if the exchange stepped in and intervened formally or informally in response to complaints.

But the fact so many contracts have been closed on just two days, with almost no movement in prices or the forward structure, suggests a settlement has been reached, with or without pressure from the exchange.

Ends --

By John Kemp, Reuters market analyst - for Commodities Now.

The views expressed are his own.

Attachments:

COCOA-OI-EVLN.pdf	78 Kb
COCOA-OI-EVLN2.pdf	76 Kb
COCOA-OI-EVLN3.pdf	76 Kb