Cocoa processors and chocolate makers are stockpiling supplies of beans on fears the London market could face a temporary supply crunch if top producer Ivory Coast's overhaul of the sector delays exports later this year.
The cocoa industry is concerned the reform could leave exporters with uncovered costs and fail to improve the incomes of hundreds of thousands of struggling farmers, and as a result that the 2012/13 season could get off to a slow start.
European processors and chocolate makers have been reluctant to release beans from their stocks onto the futures market in case of any problems with the new season, which begins on Oct. 1, dealers said.
"They're frightened of releasing stock to the futures market and then having to pay an awful lot more to get it back later on when they need it," said Jonathan Parkman, joint head of agriculture at broker Marex Spectron.
The concerns over delays have not pushed up overall cocoa prices but instead have affected the structure of the NYSE Liffe futures market, with nearby contracts trading at premiums to later-dated contracts.
Liffe July cocoa futures are trading at a 52 pound ($81.66) per tonne premium to March futures. Usually nearby contracts trade at a discount, because longer-dated contracts take into account the cost of holding the commodity and interest.
A premium on nearby futures contracts typically suggests tight supplies, but after a record global cocoa surplus in 2010/11, dealers say that on this occasion it reflects uncertainty over Ivory Coast's new system.
"The market is not the way it is because of a real physical shortage, it's based on a perceived physical shortage, but I believe that perception will be proved to be wrong," said Derek Chambers, head of cocoa at France-based commodities firm Sucden (Groupe Sucres et Denrees).
"I think there's going to be a lot more cocoa available in October and November than the market needs; manufacturers are being quite rightly cautious and holding onto stocks."
Exporters are also exercising caution with their sales contracts.
"The way that we and other exporters are selling the new crop is not to put our head in a noose. You sell November/December shipment; you don't sell first half of October shipment," said Chambers.
IVORIAN REFORM
Under Ivory Coast's new system, the government will set a guaranteed price for farmers for the 2012/13 season starting Oct. 1.
Cocoa traders and the Ivorian government are expected to wrangle over the costs of getting cocoa from the bush to ports for months to come, however. Plus some farmers could resort to smuggling if they are unhappy with the price, so there's uncertainty over the timing of exports from the next crop.
"Farmers will sell. It's a question of who they sell to. If they sell to the government at the fixed price, there's no issue," said Parkman.
"If the market price has run up significantly and by transporting the cocoa out of Ivory Coast illegally and smuggling it out through neighbouring countries the farmer is able to achieve a much higher price, then the central marketing system may be short of cocoa to fulfil the contracts which they've sold previously."
The government has been negotiating with traders since February on the costs of transporting beans from the bush to ports and the scale of reimbursement, and some are sceptical that an agreement will be reached by the target date of Sept. 15.
"It's going to drag on beyond the 15th and the early weeks of the season. Exporters who have contracts to deliver Ivory Coast beans at early dates will have to buy from farmers without knowing what their evacuation costs," said Steven Haws of cocoa research firm Commodities Risk Analysis (CRA).
The negotiations are particularly difficult because there are costs that the government can't acknowledge, including the bribes that exporters must pay at roadblocks, Haws added.
Police and army roadblocks, used to extort money from motorists, add to the costs of transporting cocoa along Ivory Coast's main transport routes, which are used to carry around half of the country's total production to port.
BEAN COUNT
The steady drawdown of exchange-graded stocks is contributing to the inverted structure of the futures market, although global stocks remain high following the record surplus.
Valid cocoa stocks in NYSE Liffe's nominated warehouses totalled 64,260 tonnes as of May 14, according to exchange data.
Marex Spectron estimates world cocoa stocks will total around 1.89 million tonnes at the end of the 2011/12 season.
"We're not talking about a shortage of cocoa overall. Last year we had a massive surplus. This is very much about the discrepancy between the amount of graded certified cocoa and the willingness of holders of the other physical cocoa stocks to release these stocks onto the futures market because of the uncertainty about the Ivory Coast situation," said Parkman.
Exporters hedge their exports by selling futures contracts short, and if they are uncertain about when cocoa will reach Europe, they will want to place their hedges as far forward as possible, which is also weighing on the prices of later-dated contracts.
"Everyone is hedging their Ivorian cocoa in March, which is why March is weak relative to September and December," said a European soft commodities analyst.
"The nearby structure tells you there are worries and they are not going to be resolved until the cocoa starts flowing."
This is not the first time in recent years that the Liffe futures market has become inverted.
In 2010, a hedge fund run by Armajaro Asset Management caused a stir in the cocoa market when it took delivery of almost all available Liffe stocks, helping drive the spot contract to a 32-year high.
"There hasn't been any activity that I have seen that would suggest that somebody has built up an exceptionally long position as happened in 2010," said Haws of CRA.
