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Smaller Cocoa Supply Deficit Expected, Outlook Shaky

Source: Reuters
29/07/2013

29 July 2013 - Rising output in top cocoa producers Ivory Coast and Ghana will lead to a smaller supply deficit in the coming crop year, but fragile demand should keep prices around current levels, acoording to a Reuters poll of 11 traders and analysts.

Overcapacity in the grinding sector, which turns beans into cocoa butter and powder - used to make chocolate, cakes and biscuits - will also help depress prices, poll respondents said, but could spark a shake-out of the industry.

Demand for cocoa beans got a boost earlier this year as chocolate makers replenished run-down inventories of cocoa butter.

"The inventory rebuild cycle in cocoa butter is over, and cocoa butter prices will likely fall in order to attract true demand from a depressed Europe and U.S.," said Shawn Hackett, president of Hackett Financial Advisors.

"While there could be an increase in Asian cocoa powder demand in the back half of 2013, such an increase would not be enough to create a combined ratio high enough to offer good returns to grinders."

When cocoa processors grind beans, they create what is known as cocoa liquor, from which butter is extracted and then used along with the liquor to make chocolate. A solid mass referred to as cocoa presscake is left and is then processed into powder.

The so-called "combined cocoa ratio" is the sales price for cocoa butter and powder, relative to the price of beans. A higher ratio means higher returns for processors.

Poll participants expected top grower Ivory Coast to produce a median 1.530 million tonnes of cocoa in the 2013/14 crop year, which runs from October to September, well above the 1.405 million tonnes estimated in the year to September 2013.

Ghana, the world's second-largest producer, should produce an 840,000 tonne crop, up from a forecast of 800,000 tonnes for 2012/13.

Although demand may exceed production of new beans in 2013/14 by 62,500 tonnes, the deficit will still be below the 100,000 tonnes estimated for this year in a previous poll, while global economic uncertainty is undermining demand.

Price are seen fairly steady, easing slightly in 2014.

ICE spot cocoa futures were forecast at a median $2,500 a tonne by the end of 2013, steady from the previous forecast in January. The contract, which settled at $2,360 on Wednesday, was seen averaging $2,375 a tonne over 2014.

On Thursday, the contract crept up to a 2-1/2-month high at $2,381 before paring gains.

Liffe's second-month contract is forecast to reach 1,700 pounds by the end of 2013, up from 1,600 pounds polled in January, but still well below a 33-year peak at 2,465 pounds struck in mid-2010 on supply concerns and a rise in European grinding demand.

TOO MANY GRINDERS

Global butter ratios have risen this year as grinders have rebuilt inventory after eating through a glut and demand has been steady.

In Asia, cocoa butter ratios have rallied about 12 percent to above 2.0 times London futures since January on seasonal demand and after poor margins forced grinders to cut output.

The cocoa butter ratio in the United States has increased by a quarter since the end of March, reaching around 2.3 last week, according to Cocoa Merchants' Association of America data.

Ratios in Europe have also risen, but the grinding sector is under pressure from sagging powder demand.

Traders said the large number of grinders was a key issue, with the industry squeezed by poor margins.

"Demand will be overshadowed by the global overcapacity that exists in cocoa processing," said a U.S. dealer. "Combined ratios will remain under pressure unless or until further rationalisation takes place."

Expectations for some restructuring among grinders rose after Barry Callebaut, the world's No. 1 chocolate and cocoa-product maker, sealed the purchase earlier this year of Singapore's Petra Foods' cocoa processing business for $860 million

A plan by Archer Daniels Midland Co to sell its cocoa business is also being closely watched in the grinding industry.

"The very likely consequence will be, in the next few quarters, a decommissioning of a significant portion of the excess grind capacity via factories closures or lines reallocation," said a dealer at an international trading house in France.

"This effort should be particularly strong in Asia, and will likely lead to a recovery of powder prices and possibly butter as well, and a support of the combined ratio."

Bean prices, meanwhile, could receive some structural support from the Ivory Coast's strategy of forward selling a large proportion of its crop.

"This causes massive hedge selling in cocoa futures heading into September and then offers a vacuum of supply thereafter as this structural hedging pressure subsides," said Hackett at Hackett Financial Advisors.

Ivory Coast has forward sold 750,000 tonnes of its upcoming 2013/14 cocoa crop as of end-June, sources at the finance ministry and industry regulator said, making rapid progress toward a targeted 80 percent.



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