COCOA BUFFER STOCK MAY FACE UPHILL BATTLE - TRADE
The International Cocoa Organization
(ICCO) buffer stock could face an uphill battle to halt the
downtrend in world cocoa prices when it begins buying
operations in the next few weeks, cocoa traders said.
    Traders said they believed buffer stock purchases could
reach 75,000 tonnes in a matter of weeks without lifting prices
significantly, given the amount of surplus cocoa overhanging
the market. The buffer stock may begin buying shortly as the
ICCO 10 day average indicator price is now at 1,578.03 Special
Drawing Rights (SDR) per tonne, below the 1,600 "must buy" level.
    Rules governing buffer stock operations were agreed last
month by the ICCO council. Buying will begin once the buffer
stock manager has completed preparations, traders said.
    Some traders said the buffer stock manager may delay buffer
stock buying until mid or end-April when changes in months used
to calculate the ICCO indicator may lift the 10 day average
above the 1,600 SDR "must buy" level.
    The ICCO indicator price is calculated from the average of
the second, third and fourth positions on the London and New
York futures markets. The daily price was 1,577.61 SDR per
tonne yesterday.
    Months used currently for the indicator are May, July and
September, but these are set to change to July, September and
December on April 15, prior to May becoming the New York spot
month, traders noted.
    The introduction of December into the calculations may lift
the daily SDR price as December is currently quoted about 75
stg above May on the London terminal market.
    But the buffer stock manager would have to wait for the
higher daily price to feed through into the 10-day average, the
indicator which governs his activities, traders said.
    "The buffer stock manager is obviously looking at the
implications of delaying until forward prices lift the
indicator since it might mean he has to buy less cocoa," an
analyst from a leading cocoa trade house said.
    Traders said the buffer stock purchases could reach 75,000
tonnes fairly quickly once buying starts. If purchases reach
this level within six months, buying is suspended pending an
ICCO council review of price ranges. But some cocoa market
watchers said the buffer stock may benefit from recent
forecasts for a poor Brazilian Bahia temporao crop at 1.5 mln
to two mln 60 kilo bags against initial expectations of up to
three mln.
    A lower than expected Brazilian crop may cut the 1986/87
world surplus to between 50,000 and 70,000 tonnes, compared
with a recent forecast by the ICCO statistics committee of
94,000 tonnes, traders said.
    In these circumstances, the buffer stock may only need to
buy between 20,000 and 30,000 tonnes to lift prices above the
"must buy" level.
    But some dealers said the ICCO buffer stock rules may put
constraints on how quickly and effectively the buffer stock
manager can remove cocoa from the market.
    The buffer stock system of price differentials set
according to quality and a 15 pct limit on purchases from
non-members could limit the buffer stock's scope for action,
dealers said.
    Most of the cocoa readily available to the buffer stock is
nearby in-store material of Malaysian and Ivory Coast origin.
    But the buffer stock can only buy 15 pct Malaysian cocoa as
Malaysia is not an ICCO member, while purchases of nearby cocoa
can only reach 40 pct in any one day, which forces the buffer
stock to buy some intermediate and forward shipment material.
    Limits on buffer stock purchases of nearby and non-member
cocoa will reduce the impact on terminal prices which are
pressured by the overhang of Malaysian material, traders said.
    Buffer stock purchases of forward shipment cocoa from
quality producers such as Ghana will have only a limited impact
on futures, but is likely to widen physical market premiums for
this cocoa over futures.
    Ghana's premium to the terminal has risen to about 50 stg
from 25 to 30 stg a month ago partly in anticipation of buffer
stock buying, dealers said.
    "The buffer stock may not help the terminal market, but will
provide a backstop for quality cocoas," one trader said.
    Traders cautioned that views on the impact of the buffer
stock were "all prognostication" and that no one could hope to
predict accurately what the result would be. Psychologically
buffer stock buying should help prices, but since the buffer
stock already holds a carryover of 100,000 tonnes from the
previous cocoa agreement and the market is in surplus, dealers
expressed doubts purchases can counter bearish pressure.
    In June the ICCO is due to discuss rules for a withholding
scheme as an additional market support mechanism.
 REUTER
