Bloomberg News

Cocoa to Get Boost by Year-End as Grinders Erode Butter Glut

July 26, 2012

Cocoa processors are using up a global butter glut instead of grinding new supply just as El Nino may cut world production, potentially boosting bean prices as buyers get ready for the year-end holiday season.

Factories are using cocoa-butter inventories, leading to lower U.S. and European second-quarter grindings, said Steven Haws, founder of Commodities Risk Analysis LC. Processor Delfi Cocoa (Europe) GmbH slowed bean grindings at its plant in Germany on July 1 and Euromar Commodities GmbH also cut back in the country. Cocoa may rise to $2,450 a metric ton by the fourth quarter as stockpiles decline and grinders need to meet more demand for holidays, Rabobank International estimates.

Cocoa has climbed 7.5 percent this year on speculation El Nino, a warming of the Pacific Ocean, will curb production. Indicators of an El Nino event strengthened, with climate models suggesting the weather pattern will form this year, Australia’s Bureau of Meteorology said July 24. Global output fell by an average 2.4 percent in El Nino years, according to the London- based International Cocoa Organization.

“The industry is eating away butter and powder stocks, but they will have to come back up online again ahead of the holiday season,” said Keith Flury, an analyst at Rabobank in London. “That coupled with a potential for smaller crops next season is likely to boost prices.”

Shortage Forecast

Cocoa supply will lag behind demand by 93,000 tons in the 2012-13 season starting Oct. 1, Rabobank forecasts. An El Nino may exacerbate the potential shortage, according to the ICCO. The beans traded on ICE Futures U.S. in New York are the fifth best performer in the Standard & Poor’s GSCI gauge of 24 raw materials, after wheat, soybeans, Kansas wheat and corn. Cocoa for September delivery climbed 1.7 percent to $2,268 a ton by 7:58 a.m. on ICE.

Demand for cocoa butter, which accounts for as much as 20 percent of the weight of a chocolate bar, fell after the global economic recession in 2008-09, according to Marex Spectron Group. Higher bean prices also prompted manufacturers to reduce bar sizes, said Euromonitor International Ltd., a consumer research company based in London. That helped created a glut of cocoa butter.

Global grindings advanced 4.9 percent in 2010-11, boosted by emerging market demand for cocoa powder, used to make cookies, ice cream and soft drinks, ICCO data show. That helped push powder prices above butter for most of last year, according to Commodities Risk Analysis data.

Three-Year Low

A drop in powder prices this year resulted in grinders buying back butter that slowed processing rates. Cocoa grinding in Europe fell 18 percent in the second quarter to a three-year low, according to the European Cocoa Association in Brussels. In North America, processing declined 9.8 percent in the period, the National Confectioners Association in Washington said.

Powder prices, which reached a high of 4,100 euros ($4,979) a ton last year, have dropped to about 3,000 euros a ton, according to Haws of Commodities Risk Analysis. Cocoa butter, which trades as a ratio to the price on the NYSE Liffe exchange in London, is about 1.2 times the exchange price, up from a low of 1 last year, he said.

“The balance is shifting back to butter as ratios are starting to go up,” said Peter G. Johnson, chief executive officer at Morristown, New Jersey-based Transmar Commodity Group Ltd., owner of Euromar and processing facilities in Ecuador and the U.S. “Origin factories have started to slow down processing due to growing unsold solids stocks. If this continues butter ratios can rally further.” Cocoa butter is usually traded in liquid form, while powder is solid.

Before Holidays

Chocolate makers’ need to buy cocoa products before the start of the holiday season may force factories to start processing again, as inventories are used up, according to Rabobank’s Flury. Industry reforms at top producer Ivory Coast may mean supply disruptions and higher cocoa prices, he said.

Ivory Coast planned to sell 70 percent of its 2012-13 crop that starts in October before the harvest. The so-called forward sales started on Jan. 31. The implementation of the new system could cause “start-up problems,” Victor Balli, chief financial officer at Barry Callebaut AG, the world’s biggest maker of bulk chocolate, said in an interview on June 1.

“The outlook for the cocoa market will depend on consumption in the third quarter and to what happens to the Ivorian reform,” said Kona Haque, an analyst at Macquarie Group Ltd. in London.

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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