World cocoa prices have recovered on Tuesday after suffering losses of more than 20% earlier in the week. The sharp decline was driven by record low liquidity in the market, as technical triggers prevailed.
Prior to this week’s slump, cocoa futures traded on the ICE exchange – used as a global benchmark – had nearly tripled in value this year due to adverse weather and disease in top producers Ivory Coast and Ghana. This sharp rise left many physical market players out of pocket and even drove hedge funds away, leaving the futures market in the hands of algorithmic funds programmed to follow similar technical signals.
In the absence of liquidity, these funds were able to exaggerate price swings on both the upside and downside. Jonathan Parkman, head of agricultural sales at Marex, said, “The lack of liquidity is going to move the market disproportionately in both directions.”
July London cocoa futures fell nearly 15% on Monday, followed by a further 10% decline at the market open on Tuesday. However, they eventually settled up 3.3% at 7,929 pounds per metric ton, while July New York cocoa futures rose 3.9% to $9,283 a ton.
The market is currently focused on crop development in Ivory Coast and Ghana, which will become clearer in the next two months, providing investors with a better sense of whether a recovery is on the cards for next season. With supplies remaining extremely tight, there are no new fundamental factors driving the recent price volatility.
ING noted that the ICE exchange’s move to increase initial margins on cocoa futures is likely to bring a further reduction in liquidity, contributing to the elevated price swings.