London cocoa prices ended sharply higher after a volatile session on Thursday as a nervy market tried to gauge the impact of the latest crop estimates for top producer Ivory Coast, which raised estimates for main crop output to a 900,000-1,100,000 range.
Prices opened lower and rapidly fell to a two-year continuation low at 850 pounds per tonne, but then recovered ground as initial sellers turned buyers and fuelled a bout of short covering.
Players were still trying to digest the new numbers, which would reduce the overall deficit or even mean a surplus for the 2003/04 season.
Front-month March closed 28 pounds higher at 907 pounds a tonne, on 3,385 lots out of a substantial total turnover of 14,670 lots.
Second month May ended 22 pounds up at 891 on 6,200 lots. It moved between 892 and 850, a 2-year continuation low.
The front month, in backwardation still holds the highest open interest, while the rest of the market is in carry (contango), so many traders have taken the second month as the benchmark.
March/May narrowed to around an eight-pound premium from 13 on Wednesday.
Dealers said the market was still finding support from structural activity, adding that the premium in the front month was technical and not related to supply and demand factors.
"If you are short in March you can't just buy cocoa at origin to cover. Firstly, it might make more sense to buy the short back than to buy it at origin. And there is very little time for people who want to bring in new cocoa to deliver it against March," a dealer said.
Foreign-based pod counters said on Thursday Ivory Coast's main cocoa crop was expected to reach some 1.060 million tonnes and traders also quoted a leading analyst report forecasting 1.1 million tonnes for the Ivorian main crop.
All the latest forecasts were higher than a previous estimate from the BCC of 800,000 to 900,000 tonnes and some dealers said it could push prices lower in the short term.