Bloomberg News

Chocolate Binge Topping $100 Billion Boosts Cocoa: Commodities

November 24, 2011

Nov. 24 (Bloomberg) -- Shrinking cocoa harvests in West Africa, the largest producing region, are diminishing a glut of beans just as sales of chocolate confectionery exceed $100 billion for the first time ever.

Global supply will decline 7.7 percent in the year to September, shrinking the surplus to 32,000 metric tons, from 434,000 tons a year earlier, according to Marex Spectron Group Ltd., which trades the beans in New York and London. Grindings, a measure of demand, will gain 1.9 percent to a record 3.9 million tons, according to the median estimate of 10 analysts and traders surveyed by Bloomberg. Prices will rise 12 percent to $2,700 a ton in three months, Goldman Sachs Group Inc. estimates.

Cocoa slumped 36 percent since March as a supply glut widened and exports from Ivory Coast, the biggest producer, resumed after a civil war. Global sales of chocolate confectionery rose 34 percent to $102 billion in the past five years, led by developing regions even as global growth slows, according to Euromonitor International Ltd., a London-based consumer research company.

“Grindings will rise again this year because demand continues to grow in emerging markets even as economies slow in Europe and the U.S.,” said Kona Haque, an analyst at Macquarie Group Ltd. in London who has covered commodities for 14 years. “The Asians and Latin Americans have finally found a taste for chocolate-based confectionery such as biscuits and ice creams.”

Net-Short Position

Cocoa fell 21 percent to $2,404 this year on ICE Futures U.S. in New York, heading for the biggest annual drop since 2003. The Standard & Poor’s GSCI index of 24 commodities rose 1 percent this year as the MSCI All-Country World Index of equities fell 15 percent and Treasuries returned 9.7 percent, a Bank of America Corp. index shows.

Hedge funds and other large speculators held a net-short cocoa position, or bets on lower prices, of 1,866 futures and options in the week ended Nov. 15, Commodity Futures Trading Commission data show. That’s down from 14,120 contracts in October, when they were the most bearish in 11 months.

Output in Ivory Coast, accounting for 40 percent of last year’s supply, will slump 18 percent this season after too little rainfall and the spread of black pod, a fungal disease, Marex estimates. Farmers in neighboring Ghana, the second- biggest producer, will reap 14 percent less this season, the brokerage predicts. Global supply will drop to almost 3.9 million tons from 4.22 million tons.

Civil War

The rebound anticipated by Goldman wouldn’t return prices to the 32-year high of $3,775 reached in March, when Ivorian supplies were disrupted by a civil war that erupted after disputed presidential elections in November. Commerzbank AG expects a first-quarter average of $2,700, 18 percent less than a year earlier and the lowest for the period since 2009.

The decline from a year ago will help contain costs for Vevey, Switzerland-based Nestle SA, whose chocolate brands include Milky Bar and Smarties. The world’s biggest food company told investors Oct. 20 that raw-material costs would jump as much as 3 billion Swiss francs ($3.3 billion) in 2011.

Demand may be limited should Europe’s debt crisis tip economies back into a recession. Grindings dropped by a record 6.6 percent in the 2008-09 crop year, during the worst global contraction since World War II, according to data from the London-based International Cocoa Organization. Futures retreated as much as 42 percent in the four months ended November 2008.

Cocoa Grindings

“If the situation in Europe affects other major economies in the world more than we currently expect, we could then see weaker grindings,” said Jonathan Parkman, head of agriculture at Marex in London. “I wouldn’t rule out having this conversation in a year’s time, looking back to find that cocoa grindings were actually down.”

Economists aren’t anticipating a repeat of the global recession. The world economy will expand 4 percent next year, unchanged from 2011, the International Monetary Fund forecast in September. Developing economies in Asia will grow 8 percent and Latin America 4 percent, the Washington-based group estimated.

Sales of chocolate confectionery in Latin American will reach $10.35 billion this year, more than double the amount in 2006, Euromonitor estimates. Asia-Pacific sales will reach $11.6 billion, 53 percent more than five years ago.

When beans are ground, about 80 percent is turned into cocoa liquor, which is then processed into powder and butter, according to the website of Barry Callebaut AG, the world’s largest bulk chocolate maker.

Commodity Risk

Demand in Asia is dominated by cocoa powder, used to flavor cereals, drinks and baked products, according to Shawn Hackett, president of Hackett Financial Advisors Inc., a brokerage and consultant based in Boynton Beach, Florida. Cocoa butter, used in chocolate bars, traded at a premium to the powder from 2002 to 2010, switching to a discount in about mid-2010, according to Commodity Risk Analysts, a researcher based in New York.

Cocoa grindings will also expand as processors add capacity. Barry Callebaut said Nov. 18 it formed a venture to build a processing plant in Indonesia. The Zurich-based company is also expanding five of its factories. Cargill Inc., based in Minneapolis, is enlarging its plant in the Netherlands.

“Grinders could be encouraged to rebuild stocks,” said Lysu Paez, a Paris-based analyst at Natixis SA, the investment- banking and asset-management unit of Groupe BPCE. “If demand from emerging countries turns out to be sustained, it could help the market to recover.”

--Editors: Stuart Wallace, John Deane

To contact the reporter on this story: Isis Almeida in London at ialmeida3@bloomberg.net.

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net.


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