LONDON (Reuters)

World cocoa prices headed for falls of around 20% in two days on Tuesday 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 thanks to adverse weather and disease in top producers Ivory Coast and Ghana.

The ascent left many physical market players out of pocket and even drove hedge funds away, dealers said, leaving the market in the hands of algorithmic day trading 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,” he explained.

July London cocoa futures traded on the ICE exchange fell nearly 15% on Monday, their largest one day loss ever. They were down 4.4% to 7,340 pounds a metric ton by 1149 GMT, while July New York cocoa futures were down 5% at US$8,500 a ton, having lost nearly 16% of their value on Monday.

The market is laser-focussed on the crop development in Ivory Coast and Ghana, which will become clearer in the next two months, alerting investors as to 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 their 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 had 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 further reduce liquidity.

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

In other soft commodities, July robusta coffee fell 1.4% to US$4,103 a ton – having hit a record high last week of uS$4,338 – while July arabica coffee fell 2.2% to $2.2235 per lb.

May raw sugar fell 0.9% to 20.01 cents per lb, while August white sugar fell 0.4% to US$571.80 a ton.