By Julie Wernau

Cocoa prices dropped to a three-year low as bullish traders leave a market whose fundamental outlook has changed dramatically going into a crucial harvest season.

Cocoa for December delivery fell 3.5% to end at $2,491 a ton on the ICE Futures U.S. exchange, the lowest close for the most active contract since Sept. 3, 2013.

"The bull market for now is over in cocoa, unless there is a dramatic turn in the weather," said Nicholas Gentile, managing partner at NickJen Capital Management.

On Friday, a dramatic selloff in the cocoa market pushed prices in the options markets far below most bets, a large portion of which were held at a strike price of $3,400 a ton. Most expired at worthless levels. The cocoa market is coming out of a year in which demand for cocoa outstripped production. But for the 2016/2017 crop, which is moving into its main harvest in key growing regions in west Africa, some analysts are predicting surplus cocoa of 250,000 tons. An earnings announcement last week by Barry Callebaut, the world's largest cocoa company, helped cocoa prices move another leg lower. The company announced an 8.7% drop in profit, largely attributing the drop to sluggish demand for cocoa products.

The news followed mixed results in the third quarter for cocoa grindings, or the tonnage of beans processed, which is largely used by traders as a proxy for cocoa demand. Grindings in Asia jumped while European grindings saw only a modest gain, and North American grindings were nearly flat.

Hector Galvan, senior market strategist at RJO Futures in Chicago, a commodity futures brokerage, said he was surprised by the dramatic selloff.

"Iunderstood that the lack of demand would likely take us down, but this is extreme. I am getting most people out of the way of the collapse and just looking for points where the market will likely turn and find fair value. The declines in grindings were not out of this world," he said.

In other markets, arabica coffee for December rose 1.8% to settle at $1.7435 a pound, frozen concentrated orange juice for January rose 1.3% to close at $2.2205 a pound, raw sugar for March was up 2.5% at 22.27 cents a pound and December cotton slumped 0.1% to settle at 68.45 cents a pound.

Write to Julie Wernau at julie.wernau@wsj.com

(END) Dow Jones Newswires

November 07, 2016 15:57 ET (20:57 GMT)

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