Ivory Coast resolution may calm cocoa market

by Ron Sterk
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Resolution appeared on the horizon last week in the Ivory Coast. Violence there had followed an election that was meant to end political unrest still simmering after the 2002-03 civil war. Meanwhile, the country’s cocoa bean mid-crop was awaiting harvest as farmers focused on saving their lives rather than crops, and an estimated 400,000 tonnes of cocoa beans, about 30% of the country’s annual production, from the main harvest was sitting in port warehouses awaiting the end of an export ban.

Heavy fighting in the past month or so that left hundreds if not more than 1,000 dead appeared to be nearing its end as supporters of internationally recognized president-elect Alassane Ouattara and United Nations’ forces closed in on the last stronghold of incumbent Laurent Gbagbo. Mr. Ouattara won a contested election over Mr. Gbagbo on Nov. 28, 2010, but the latter refused to step down even after election results were certified by the United Nations and other international bodies. Political tensions simmered since the election before erupting into a full-fledged civil war earlier in the year.

While the war wasn’t about cocoa, or to a lesser extent coffee, it is the export of those two products that basically fund the government of the Ivory Coast. President-elect Ouattara declared an export ban on cocoa and coffee on Jan. 23, with the intent of financially squeezing Mr. Gbagbo, who at the time still controlled the military, courts and airwaves. While some cocoa beans were smuggled out of the Ivory Coast into neighboring countries, especially Ghana, most multinational companies that export beans, or process cocoa in the Ivory Coast and export products, honored the ban, while the European Union imposed trade sanctions. Violence escalated as the export ban and trade sanctions began to have their effect and Mr. Gbagbo and his supporters basically ran out of money.

As some amount of normalcy begins to return to the Ivory Coast, the question becomes what impact will there be on cocoa markets? While the export ban, which should end once Mr. Gbagbo leaves office, effectively shut down shipments of cocoa beans and products, the actual impact was minimal because of sufficient stocks in buying countries. Europe is the major buyer of Ivory Coast cocoa, although a significant amount also comes to the United States.

The trade became increasingly nervous in late February when a resolution to the political crises appeared nowhere in sight. The tension had its greatest effect on futures markets, as might be expected. Nearby New York May cocoa bean futures closed at a recent high of $3,733 a tonne on March 3, up 34% from $2,777 on Nov. 29, 2010, the day after the presidential election in the Ivory Coast. As Mr. Ouattara’s forces made relatively quick progress in late March, including the taking of the key cocoa exporting port of San Pedro, futures prices plummeted to a recent low of $2,952 on March 31, down 21% from the high just four weeks earlier.

Traders anticipate even more pressure on futures prices once a final resolution is reached and exports may resume in force.

The effect on cash cocoa powder prices was much different. Powder prices already were at record highs prior to the election last fall, but for primary reasons other than political unrest in the Ivory Coast. As has been stated previously in this column, some processors in the United States as well as in other parts of the world, especially Indonesia, also a primary source of U.S. cocoa beans and products, curtailed processing the past two years because of ample cocoa butter stocks. Since about equal amounts of powder and butter are produced in the processing of cocoa beans, processors chose to reduce grinding until butter supplies were worked down. That has been a slow process, with powder prices actually moving above butter prices in the past few months, a phenomenon unheard of in recent history.

While overall cocoa (and chocolate) demand remains a matter of debate due to the recent recession, powder demand easily surpassed the supply coming from reduced processing operations. As a result powder prices moved still higher with only small amounts available near term. The basic 10% to 12% butterfat natural cocoa powder was quoted at $2.45@2.55 a lb, up about 30% from a year ago (low side comparison) and 175% above the latest five-year average.

Buyers seeking fill-in cocoa powder for immediate needs have in some cases gone lacking. A few who did not book ahead but waited for lower prices were forced to pay up or do without. In most cases use of cocoa powder substitutes or extenders were maxed out months ago when powder prices began moving upward. Several companies have announced price increases due at least in part to high cocoa powder prices.

The Sosland Publishing chocolate bar index stood at 223% of the 2005 base of 100, up 21% from a year earlier and 66% above the five-year average.

With the end of the crises in the Ivory Coast many traders suggested not much would change for cocoa powder in the short term, given most processors are sold out of potential powder production for the rest of 2011. Some buyers were willing to pay even higher prices for 2012 material to ensure supply. At the same time, some material was available at flat to lower prices, with sellers expecting cocoa bean supplies to be more available once the Ivory Coast settles into some form of normalcy in the weeks ahead.

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