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Written by Edward Faubert  |

December 12, 2011

Weather & Politics Hold Keys To Cocoa Prices

Details

Despite increasing demand, record cocoa crops keep prices under pressure.

Cocoa prices have been in a slump since March 2011. Prices, as measured by the ICE futures contract, have fallen from a high of $3700/ton to currently $2200, a decline of 40 percent. That has left a bitter taste in the mouth of producers.

According to the ICCO (International Cocoa Organization), total world production of cocoa for the crop year that ended Sept. 30 was 4.2 million tons, up from 3.6 million tons the previous year. Closely watched ending-stocks on Sept. 30 were 1.9 million tons, considered a very healthy level, and one not seen since 2005/06. Estimates for this year’s supply/demand are again for a surplus, although not as large as last year.

Given back-to-back surpluses, some traders are anticipating a range for the next three to six months of $2000 to $2400 per ton basis ICE futures New York. Of course, weather conditions in West Africa and political developments in Ivory Coast will be key factors. On Monday, prices hover just above $2000.

The cocoa manufacturing process involves firstly grinding cocoa beans. The grindings are then converted to cocoa liquor and the liquor pressed to create cocoa powder and butter, all of which are traded in the cash market.

Grindings, which roughly track chocolate consumption, were 3.6 million tons in the 2010/11 season, resulting in a year-end surplus of 325,000 tons. This follows a supply deficit from the previous year of around 100,000 tons.

Historically, cocoa demand has been been very resilient, averaging a 3 percent annual increase over the past 100 years. Even during the peak prices seen in the 2010/11 crop year, grinding rose a resilient 3.5 percent.

Cocoa production has a very long crop cycle. It takes about five years from the time a cocoa tree is planted for it to produce its first beans. Cocoa trees can remain productive for decades, with 10 of those years considered peak production years. Total world trade in cocoa is about $5 billion annually and production is mostly from small, privately owned plots by 5 million to 6 million farmers located within 20 degrees of the equator.

Cocoa prices rallied to a 30-year high in March 2011 on concerns of drier than normal weather in West Africa and political instability in Ivory Coast.

Weather has a way of changing, and as the rains came, cocoa prices began their present slide.

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