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.
  

