Cocoa prices recover after slumping 20% amid record low liquidity

World cocoa prices recovered on Tuesday after clocking losses of more than 20% for the week earlier in the session as technical triggers prevailed thanks to record low liquidity, with even hedge funds having largely exited the market during its breathtaking ascent this year, dealers said.
 

Prior to this week's slump, cocoa futures traded on the ICE exchange - and used as a benchmark to price the bean the world over - had nearly tripled in value this year owing to adverse weather and disease in top producers Ivory Coast and Ghana.
 

The ascent left many physical market players out of pocket and has even driven hedge funds away, dealers said, leaving the futures market in the hands of algorithmic funds programmed to follow similar technical signals.
 

In the absence of liquidity, these funds exaggerate price swings on both the upside and downside.
 

"Is there a concrete bit of news that drove the market here? No," said Jonathan Parkman, head of agricultural sales at Marex.

"The New York position is tiny, a record low in modern times. The lack of liquidity is going to move the market disproportionately in both directions."
 

July London cocoa futures on the ICE exchange fell nearly 15% on Monday for their largest one-day loss and then lost more than 10% at the market open on Tuesday.
 

They were last up 2% at 7,834 pounds a ton by 1558 GMT while July New York cocoa futures were up 3% to $9,190, having lost nearly 16% on Monday.
 

The market is focused on crop development in Ivory Coast and Ghana, which will become clearer in the next two months, alerting investors on whether a recovery is on the cards or not next season.
 

The two countries together produce nearly 60% of the world's cocoa and, with crop prospects still murky for now, there are no new fundamental factors driving prices and supplies remain extremely tight.
 

ING noted that Monday's price slump followed a move last week by the ICE exchange to increase initial margins on cocoa futures by 23% per contract. The increase is likely to bring a further reduction in liquidity.
 

"That was the third increase in margins this month. The higher margins and volatility in cocoa have led to open interest declining from around 400,000 lots in November to around 243,000 lots currently," the bank said.
 

In other soft commodities, July robusta coffee fell 3.5% to $4,020 a ton - having hit a record high last week of $4,338 - while July arabica coffee fell 4.6% to $2.1670 per lb.
 

May raw sugar lost 1.8% to 19.83 cents per lb while August white sugar fell 1.3% to $566.60 a ton.