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cocoa futures

September 12th, 2013

Cocoa demand will exceed supply for a second year in the season that starts Oct. 1 as West African output shrinks and chocolate sales expand to a record.

Production will be 118,000 metric tons smaller than consumption in 2013-14, on top of a shortage of 98,000 tons this year, according to the mean in a Bloomberg survey of nine traders, grinders and analysts. The surplus was 87,000 tons in 2011-12, the International Cocoa Organization estimates. Chocolate sales will rise 6.2 percent to $117 billion next year, researcher Euromonitor International Ltd. forecasts.

Futures rose to the highest in almost a year in London on Sept. 5, entering a bull market. Dry weather in Ivory Coast, the largest producer, may damage next season’s main crop, the bigger of two annual harvests, and output in neighboring Ghana may contract as the government cuts spending on pesticides.

“We’ve seen production not as strong as two years ago, so the stocks are being absorbed by the market,” Francisco Redruello, a senior food analyst at London-based Euromonitor, said in a Sept. 9 interview. “There was some dry weather before the main crop and we are now seeing some more humid conditions, but we would be very, very surprised to have a bumper crop of cocoa beans.”

Cocoa futures gained 16 percent in London and 15 percent in New York this year. The beans are the second-best performer in the Standard & Poor’s GSCI gauge of 24 raw materials, after crude oil. Stockpiles monitored by the NYSE Liffe exchange were 139,880 tons on Sept. 2, a 58 percent slump from an almost two-year high in September 2010, bourse data show.

Cocoa Futures: Istanbul Conference

Redruello will be with about 200 participants, including representatives of Hershey Co. (HSY), Nestle SA and Barry Callebaut AG, attending the Brussels-based European Cocoa Association’s two-day conference starting in Istanbul today.

Farmers in Ghana, the second-biggest producer, will harvest 800,000 tons in 2013-14, Ecobank Transnational Inc., a Lome, Togo-based lender, said in an Aug. 29 report. That’s down from the 850,000 tons in 2012-13 estimated by the London-based ICCO. Ghana plans to cut by half the use of subsidized pesticides next season after government revenue fell, the country’s Cocoa Board said Aug. 28.

Ivory Coast’s output may be 1.4 million tons in 2013-14, from 1.495 million tons, Ecobank said. Farmers in Ivory Coast reap a main crop from October to March, while a smaller harvest, called the mid-crop, is from April to September.

Cocoa Futures: Switching Crops

There was about 1 to 1.5 inches of rainfall in Ghana and Ivory Coast in the 30 days to Sept. 4, according to MDA Weather Services in Gaithersburg, Maryland. That compares with an average of 3 to 3.5 inches for that time of the year. The two countries account for 58 percent of global output. While rainfall improved this month, dry conditions may have already taken a toll, broker INTL FCStone Inc. said Sept. 7.

“We have serious risks to the main crop outlook and on the demand side grindings are picking up very nicely,” said Kona Haque, an analyst at Macquarie Group Ltd. in London, who correctly forecast in January that prices would climb this year. Grindings, or processing, are an indication of demand. Cocoa traded in New York may climb to $2,600 a ton in the next few weeks, she said. Futures were at $2,569 today.

Prices in London fell 10 percent in 2010 and 32 percent in 2011, before gaining 4 percent last year. On an inflation-adjusted basis, prices declined 29 percent in the past four years, according to data from KnowledgeCharts, a unit of Commodities Risk Analysis in Bethlehem, Pennsylvania. Lower prices mean farmers are switching to other crops including rubber, said CRA founder Steven Haws, who has followed cocoa since 1979.

“Diseases of cocoa, primarily swollen shoot and black pod, have been spreading for years,” Haws said. “These now have a large effect on production. The Far East cannot compensate for West Africa’s inability to boost production.”

Cocoa Futures: Indonesian Output

The crop in Indonesia, the third-biggest producer, which suffers from diseases including pod borer and Vascular Streak Dieback, is shrinking annually, Haws said. The harvest in the southeast Asian nation will be 430,000 tons in 2012-13, down from a May forecast of 450,000 tons, the ICCO said Aug. 30.

Money managers boosted bullish bets on cocoa traded in London to the highest in more than a year in the week ended Sept. 3, according to NYSE Liffe data. Investors held a net-long position, or a bet on higher prices, of 57,966 futures, the biggest bullish bet since Aug. 28, 2012.

Chocolate makers may have already locked in some cocoa. Hershey Co., based in Hershey, Pennsylvania, covers its commodity costs three to 24 months in advance, David Tacka, chief financial officer, said on an earnings call July 25. 1-800-Flowers.Com Inc., the Carle Place, New York-based maker of Fannie May brand chocolates, “locked in very favorable pricing on cocoa that will cover us through this fiscal year,” William E. Shea, chief financial officer, said Aug. 29.

Growing Sales

While chocolate sales measured in dollars will climb 6.2 percent next year, sales volume will gain 2 percent this year and the next after growing 1.4 percent in 2011, according to Euromonitor. Volume will advance the most in the Middle East and Africa, gaining 5.8 percent next year. It’ll jump 5.4 percent in Asia Pacific, 5 percent in Latin America, and 7.5 percent in Turkey.

Consumption in the Middle East and Africa will keep expanding, as it’s now 300 grams (0.7 pound) per person per year, less than a third of the global average, Euromonitor’s Redruello said.

“People initially bought into the rally because of dry weather in West Africa, but now consumption is also looking good,” said Jerome Jourquin, head of agricultural derivatives at Aurel BGC in Paris. “Smaller crops combined with high demand is obviously good for prices.”

- Isis Almeida in London at Bloomberg.