London, 11 August 2010

The Great Cocoa Crisis that pushed prompt London futures to a record high last month on worries about rising demand and diseased trees, and sparked complaints from some processors, appears to have passed.

Tightness in the market has disappeared as fast as it emerged. NYSE Liffe's July futures contract expired at a record 2,713 pounds ($4,272) per tonne -- a big premium to both the next-to-deliver September contract and the equivalent cocoa futures traded in New York .

But since then, prices for nearby cocoa contracts have been falling even as forward prices have held steady, erasing much of the backwardation and restoring a more normal relationship between prompt prices and those for deferred delivery.

Prices for September 2010 delivery have fallen 10 percent from 2,419 pounds at the time of the July expiry to 2,185 pounds at yesterday's settlement and are being offered lower again in trading today. Prices for December 2010 delivery have dropped 142 pounds (6 percent) to 2,111. Meanwhile, prices for December 2011 have come off by just 71 pounds (3.2 percent). Prices for December 2011 futures have traded in a relatively tight range of just 280 pounds all year and are now almost exactly back where they started in January.

Compare that with the 380 pound trading range for September 2010 futures and the 580 pound range for the July 2010 contract. While forward prices have been very steady and appear firmly anchored in fundamentals, nearby prices have been much less well behaved and show strong speculative influences.

As prompt prices have eased, the whole forward price structure has flattened, with the curve reverting to a clear and consistent contango beyond the end of 2010. The premium for September (old and scarce crop) over December (post-harvest, new crop) futures has shrunk from 313 pounds per tonne to just 65 pounds and continues to trend lower.

Scarcity premiums for September futures have continued to evaporate, even though more than 60,000 contracts are open for (potential) delivery in a month's time, indicating most market participants with short positions are confident about being able to deliver, close out their contracts or roll them forward without too much difficulty.

Continued weakness in the nearby spreads suggests many traders and investors are long and trying to job out of the positions gently without crushing the price too much. It is still possible prompt prices and nearby spreads will tighten in the run-up to expiry. But for the past month the market has felt soggy and long.

Ends --

By John Kemp, Reuters market analyst - for Commodities Now.. The views expressed are his own.

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