| Cocoa prices surged to a 23-year high in 2008 as speculative investors poured monies into the market amid concerns about dwindling supplies from Ivory Coast, the world’s largest producer. Prices for cocoa rose 70 per cent in 2008 , bucking the weakness in overall commodities prices. In its monthly report, the International Cocoa Organi-sation said that arrivals until the end of November at ports in Ivory Coast, which provides almost 40 per cent of the world’s supplies were the lowest in years. Only 251,000 tonnes of beans are estimated to have reached the local ports during the first two months of the present season, about 40 per cent below average for the four preceding seasons. December 2008 faced the same sets of issues although it is the traditional peak of the harvesting season, because of the impact of cold weather and heavy rains in early 2008 and also because of the so-called black pod disease, which has reduced use of fertilisers.
Fortis Bank has warned that the market faces its third seasonal deficit in a row, further depleting global stocks, which are already at a 20-year low. Inventories are at 39 per cent of global consumption, down from 54 per cent in fiscal year 2006.
In London, Euronext.Liffe cocoa for delivery in May 2009, the market benchmark jumped to £1,820 a tonne, the highest since October 1985.
A portion of the rise can be traced to the British pound. London cocoa is priced in sterling — and when the sterling fell in November, an arbitrage opportunity occurred for investors with foreign currencies. Those investors were able to buy the cheaper sterling-based contracts, rather than the dollar-based NY contracts, which further drove up London's cocoa price up.
But the currency impact is only part of it: There is no question that cocoa has been on an upward tear recently. In fact, if you look back over the past 18 years, you can see that cocoa has been riding high recently.
In cocoa, we have a situation that is almost the opposite of what is happening in most other hard assets, such as steel, copper and oil. Whereas those commodities are facing a supply glut, in cocoa, supply is already tight and there is some expectation of a global deficit.
There is even some chance of seeing 2,000 sterling per tonne in London and even $3,000 per tonne in New York.
Cocoa is a fickle plant. Cocoa only grows within specific latitudes no greater than 10 degrees north and south of the equator; the top two cocoa countries are Ivory Coast and Ghana. Even in these perfect climates, however, cocoa is fickle: Extended dry spells can ruin the crop, and too much water breeds disease and lower yields. The worst culprit is something called black pod disease, which can lead to crop losses between 30 and 90 per cent. While this year's outbreak in Ivory Coast and Ghana is only average, strong rains have slowed cocoa harvesting, and deliveries are down 40 per cent from normal in Ivory Coast and Ghana.
The third largest cocoa producer, Indonesia, is also seeing fewer exports. Exports from its main cocoa-producing island were down 12 per cent during the first 11 months of this year, compared with a year earlier. Expectations are that Indonesia will export 40,000 fewer tonnes this year than last, as its crop suffers from a disease called Vascular-Streak Dieback (VSD).
Fortis nevertheless says that the market is overbought, and warns that traders are “fully discounting that, on the production side, everything that can go wrong will indeed go wrong without paying attention to lower demand because of the impact of the economic crisis.”
Although cocoa consumption has been resilient in the past to economic downturns, traders forecast a drop in 2009, particularly in the US and Europe. Data from Nielson, the market research group, suggests premium chocolate could suffer as the US and European buyers become cautious. Credit Suisse recently downgraded Lindt & Sprungli, an upmarket brand, on fears about growth.
Emerging markets are really holding up well so far. Cadbury has successfully introduced Bournville in India recently. Globally growing at 13 per cent, dark chocolate is the fastest growing in the confectionary
category. India outlook
Though the major season for cocoa is almost over in Kerala, there are indications of improved prices due to a vibrant international market. Wet beans are now priced Rs 35 a kg, against Rs 30-32 during the season earlier. Dried beans prices have surged up to Rs 125-150. The domestic chocolate confectionary sector needs 50,000 tonnes of cocoa a year. India produces only 32,000 tonnes. The rest is imported, mainly from African markets. Surging prices of commodities in foreign markets and the declining exchange rates of Indian rupee have enhanced the import expenditure. Therefore the chocolate confectionary sector is eager to procure as much cocoa as possible from the domestic market. At the same time, there is increased demand for Indian cocoa in foreign markets. Swiss companies are showing interest in cocoa produced without chemical fertilisers in Kerala. Unlike in other states, the butter content of Kerala cocoa is high. Cadbury, which procures cocoa from Kerala, had no competitors earlier. But now Nestlé, Amul, Campco and others are active in the Kerala market.
The situation is different in the West. In mature markets, consumption, measured by volume, has flattened or even declined after growing by 1-2 per cent a year in Europe, and 2-3 per cent annually in the US in recent years.
As for Easter 2009, which is relatively late anyway, everyone is holding back production to the last minute. Whether cocoa is able to retain its identity as the ‘commodity of the year’ will be put to severe test in 2009! zz (The writer is the CEO of Global Capital Advisors. Financial Chronicle does not warrant the quality or accuracy of the article. It shall not be deemed a recommendation by
FC for buying or selling or investment of any kind. Investments are subject to market risks. Past performance does not guarantee future success. It is advisable to seek advice from a qualified independent advisor before investing) |