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.