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Cocoa Rally Fading as African Rains Erase Shortage: Commodities

March 15, 2012

About 90 percent of the world’s cocoa is produced on farms of fewer than 5 hectares (12 acres), which means producers often lack the money needed to combat drought, floods or disease. Photographer: Jeremy Bales/Bloomberg

About 90 percent of the world’s cocoa is produced on farms of fewer than 5 hectares (12 acres), which means producers often lack the money needed to combat drought, floods or disease. Photographer: Jeremy Bales/Bloomberg

Rain across parched cocoa plantations in West Africa, which supplies 69 percent of the world’s beans, is leading analysts to pare forecasts for shortages, threatening the biggest rally in a year.

Global output should about match demand in the crop year ending in September, compared with the 94,000-metric-ton deficit seen last month, according to estimates by Marex Spectron Group, which trades the beans in New York and London. Prices may drop 10 percent to $2,000 a ton by July, according to Rabobank International and Lome, Togo-based Ecobank Transnational Inc., which financed $227 million of cocoa and coffee trading in 2011.

Prices rose as much as 21 percent in the past two months as dry winds blowing from the Sahara toward the Atlantic battered West African plantations before a mid-crop harvest that starts next month. Farmers have struggled to keep up with a 38 percent expansion in the chocolate market since 2006, which London-based Euromonitor International Ltd. values at $105 billion. Cocoa output rose 15 percent to 3.96 million tons since 2006-07, according to the International Cocoa Organization.

“Recent rains in West Africa have been plentiful, particularly in Ghana, and this is positive for the development of the mid-crop and the new crop,” said Eric Sivry, the London- based head of Marex Spectron’s agriculture options brokerage. “Many analysts have been caught by surprise.”

Cocoa climbed 5.3 percent to $2,221 this year on ICE Futures U.S. as the Standard & Poor’s GSCI index of 24 commodities advanced 8.9 percent. The MSCI All-Country World Index of equities rose 12 percent. Treasuries lost 1.7 percent, a Bank of America Corp. index shows.

Meteorological Service

Ivory Coast’s central-western Daloa region, the biggest producing area of the world’s largest supplier, got no rain in the first 20 days of January, data from the country’s National Meteorological Service show. That reversed in February, with 82.1 millimeters (3.2 inches) of rain, or 11 percent more than a year earlier, the data show.

The rain may boost the country’s mid-crop to 350,000 tons, 10 percent more than the 10-year average, according to estimates from Ecobank and the London-based ICCO, whose members account for about 85 percent of global output. Output could reach 400,000 tons should the rain continue for another month, Ecobank estimates. About 20 percent of West Africa’s annual production is harvested from April to June.

In Ghana, the second-biggest producer, rain didn’t arrive in most of the largest growing area until the end of January, according to the Ghana Meteorological Agency. The town of Bogoso in the southern region got 91.1 millimeters in February, 79 percent more than a year earlier, the data show.

Drought, Floods, Disease

About 90 percent of the world’s cocoa is produced on farms of fewer than 5 hectares (12 acres), which means producers often lack the money needed to combat drought, floods or disease, according to the ICCO. Prices have swung from $1,396 to $3,775 since 2006.

Cameroon, the fifth-biggest supplier, may produce 20 percent less this year because of black pod fungal disease and insect infestations, the ICCO estimates. As much as 40 percent of the global crop is lost to pests and disease every year, according to the ICCO. An average cocoa tree produces about 30 usable pods a year, yielding enough beans to make about 2 pounds of dark chocolate, according to the website of Hershey Co., the maker of Hershey’s, Reese’s and Kit Kat.

Disrupted Supply

Ivory Coast’s government resigned March 8, and prices rose 5.2 percent that day on speculation supplies would be disrupted. The civil war that erupted after disputed presidential elections in November 2010 curbed exports until March, driving futures to a 32-year high of $3,775. Former Justice Minister Jeannot Kouadio Ahoussou was named the next prime minister on March 13.

While there are signs that growth is slowing, Rabobank expects a record number of beans to be ground into powder and butter, which are used in varying proportions to make different types of chocolate. Grindings fell 6.6 percent in the 2008-09 season, the biggest slump in almost 50 years, amid the worst recession since World War II, ICCO data show. The International Monetary Fund predicts global growth of 3.3 percent this year, compared with a 0.7 percent contraction in 2009, according to data compiled by Bloomberg.

Speculators are getting more bearish. Hedge funds and other money managers increased their net-short position by 29 percent to 5,766 futures and options in the week ended March 6, Commodity Futures Trading Commission data show.

Boosting Yields

Consumers are benefiting from increased supplies after Ivory Coast started a process of forward sales on Jan. 31. The government wants to sell 70 percent of the crop that will be reaped from October to September, locking in prices for farmers and spurring them to invest more in boosting yields.

Cocoa deliveries to Ivorian ports reached just above 1 million tons in the season through March 11, 2 percent below last year, according to data from ICCO. The organization forecast an 11 percent drop in Ivory Coast output to 1.35 million tons this season. The government on March 12 put this season’s crop at 1.39 million tons.

The ICCO predicted global output of 3.96 million tons and demand of 3.99 million tons on Feb. 29. Armajaro Trading Co., which employs more than 2,000 people to source and export cocoa, coffee and sugar, cut its forecast for a shortage by 50 percent to 50,000 tons on Feb. 23. Goldman Sachs Group Inc., Marex Spectron and Ecobank expect supply to about match demand and Macquarie Group Ltd. is predicting a 7,000-ton surplus.

“The mid-crop is going to be much better than people thought and that’s going to save the season,” said Edward George, a commodities specialist at Ecobank in Lome. “It’s got a good chance to be one of the highest.”

To contact the reporter on this story: Isis Almeida in London at

To contact the editor responsible for this story: Claudia Carpenter at

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