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Industry Struggles Over Cocoa Pricing Mechanism

December 6, 1987

Undated (AP) _ Traders of cocoa futures have had an eye cocked toward London this past week as consuming and producing nations struggled to agree on a market support mechanism.

As the days passed with the disagreements as wide as ever, prices slumped on the Coffee, Sugar & Cocoa Exchange in New York.

They surged ahead Thursday when word came from London that an agreement was near at hand, only to fall again when no one seemed quite sure how firm this was and what the terms were.

On Friday, they closed higher even though the two sides were still wrangling when the markets shut down for the weekend.

At issue is the International Cocoa Organization’s price-stabilizing mechanism, which involves buying surplus cocoa and putting it into a buffer stock to take it off the market.

The March contract slipped to the life-of-contract low of $1,801 a metric ton at midweek, as trader grew progressively pessimistic about the London negotiations.

Buffer stock operations have been suspended since mid-May, and negotiations between producers and consumers in September failed to restore the price- stabilizing mechanism.

One of the main problems at this round of talks was an inability to agree on a price at which the buffer stock manager would buy surplus cocoa.

Producing countries were having trouble coming up with a united front to the consumers’ suggestion that the level at which the manager must buy surplus be lowered from the current 1,600 Special Drawing Rights, or $2,182.85, a metric ton.

Special Drawing Rights are tied to exchange rates for the currencies of the United States, West Germany, Great Britain, France and Japan.

Comsumers all along have wanted a substantial cut in the level at which the buffer stock manager could intervene, said Sandra Kaul, an analyst in New York with Shearson Lehman Brothers Inc.

This could have the short-term effect of taking more cocoa off the market and strengthening prices, she noted. But if prices increased, the manager would sell buffer stocks at a lower price level than allowed now.

″So for the long term, it would limit the upside potential of prices,″ said Ms. Kaul.

The negotiations come at a time of worldwide production outstripping consumption.

The latest estimates put the amount of unused cocoa this year at a record 735,000 tons.

The surplus from the 1977-78 crop is put at 77 million tons.

However, the aim of the negotiations was to allow the buffer stock manager to buy 75 million tons, which would leave the total surplus virtually unchanged next year.

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