KANSAS CITY — Despite, and even partially because of, reduced chocolate demand, cocoa powder prices are at six-year highs and supplies are so tight some traders foresee shortages this fall.
Already in September major cocoa processors indicated they were shipping cocoa powder only to customers who had previously contracted for the supply. While spot demand wasn’t large, as most users had covered cocoa powder needs through the end of the year and well into 2010 some time ago, it was critical for those who needed fill-in supply to make up for heavier-than-expected use or to replace shipments from another seller that were not delivered for some reason.
Another developing situation involves actual chocolate, such as chips and chunksused in cookies and ice cream. Traders indicate users of chocolate have extremely light coverage for 2010, with one suggesting 95% of coverage runs out after December 2009. And for chocolate, not only have prices risen because of high cocoa values, but sugar also is at the highest level since 2005. On the plus side, milk and dairy ingredient prices are well off record highs set in 2007.
Should chocolate (or cocoa powder) supplies actually run out, manufacturers have limited options for substitution depending on application and on labeling requirements (see related story on this page).
Cocoa powder prices have been strong due to good demand as a lower-priced alternative to cocoa butter and due to cocoa processors reducing pressing, or even shutting down plants, because of excessive cocoa butter stocks. Butter demand has been down because of reduced consumption of premium chocolate that uses more butter.
Evidence of lower chocolate consumption has been demonstrated by reduced cocoa bean grind data from major using regions. The latest figures available were for the second quarter of 2009, which showed U.S. grind down about 7% from the same period in 2008 and European grind down 11%. But ideas about third-quarter grind were mixed, with some expecting lower numbers, but German grind coming in last week above expectations.
Prices for 10% to 12% natural cocoa powder quoted in Food Business News last week were $email@example.com a lb, and have held at that level since late August. The current price is up 56% from a year ago and is the highest since early August 2003.
While some sellers indicated they could not sell powder at the higher end of the price range, others said they had no powder to offer on the spot market at any price. Supplies of higher grades of cocoa powder, including red and black, have been tight for some time. A source at a major chocolate manufacturer last week said better grades of cocoa powder from Europe were unavailable. Another trader noted it was even difficult to get offers from Africa, the heart of cocoa bean production.
One trader suggested cocoa powder is in a "no lose" situation. If chocolate demand declines and processors cut production because of excess butter, outturn of powder also is reduced and prices rise, as has been the case. If candy manufacturers turn to lower-priced "compounds," chocolate made of vegetable oil with more cocoa powder and less cocoa butter, demand for powder also rises, as has been the case as well.
New York and London cocoa bean futures prices have been even stronger, with added influence from speculative fund buying, which traders said failed to accurately reflect physical supply and demand. On Oct. 5 the December future contract soared $239, or 8%, closing at $3,240 a tonne on the Intercontinental Commodity Exchange. It was a contract high and the highest nearby month close since July 2, 2008. Traders attributed the surge to speculative fund buying as computerized programs kicked in buy orders when prices reached a specific point, and other mostly non-fundamental factors.
In London, prices hit 24½-year highs last week.
"It’s a market without precedent," one cocoa trader said. "It makes no sense." He noted that when cocoa bean prices passed $5,000 a tonne in the late 1970s, it was legitimately based on a large crop failure.
Since cocoa beans are imported but priced in dollars, the weak U.S. dollar in recent months has contributed to the rising price since it takes more dollars to buy a tonne of beans. One trader estimated the weaker dollar accounted for most of the futures price run-up from July through September.
Traders have mixed views of where futures prices will go. Some suggest additional upside potential, depending on fund activity as well as fundamental concerns, such as the possible negative effect of a developing El Nino on some cocoa producing areas and a possible surge in demand if the economy recovers faster than currently indicated. One trader suggested futures prices above $3,000 a tonne for an extended period would hurt demand.
But others noted futures prices typically decline at this time of year, due mainly to selling (hedging) pressure from origin nations as the new "main crop" is harvested from October through March. Last year during this time futures prices dropped to around $1,800 a tonne creating the opportunity for a substantialamount of 2010 powder coverage.
The trade closely will monitor West Africa as harvest of the 2009-10 main crop progresses. The season officially kicked off Oct. 1 in top producing Ivory Coast. Prices paid to farmers were raised and export taxes were reduced in that country this season in an effort to encourage farmers to deliver more beans to ports sooner.
Color alternatives exist for cocoa powder
Caramel color, malted barley flour and carob are potential alternatives to using cocoa powder for coloring purposes in foods and beverages.
Cocoa extenders from D.D. Williamson, Louisville, Ky., may replace up to 50% of the cocoa powder when it is used as a color in such applications as baked foods, confectionery and chocolate drinks, said Campbell Barnum, vice-president of global marketing.
Caramel color when used alone may replace about 10% of cocoa powder, but using a higher percentage may bring about flavor issues, he said. Adding flour, milk powder and chocolate flavor along with the caramel color will create a D.D. Williamson cocoa extender that has been shown to replace up to 50% of cocoa powder.
Depending on the kind of caramel used and the kind of cocoa powder used, caramel color is two to six times darker than cocoa powder, Mr. Barnum said. The company uses Class 3 caramel color even though it is more expensive and lighter in color than Class 4 caramel color. Class 3 caramel color provides a redness that may more closely resemble cocoa powder, he said.
Briess Malt & Ingredients Co., Chilton, Wis., offers several whole grain specialty flours that have been shown to work in such applications as brownies, breakfast pastries and cocoa-flavored cereals. Using a 50-50 blend of chocolate malted barley flour and Briess caramel 40L malted barley flour may reduce the cost of cocoa in baked foods by about 30%, according to the company. A Briess black cocoa replacer, another whole grain malted barley flour, may color foods normally colored by black cocoa.
The use of carob power will depend on the manufacturer and how it affects the product, said Nichole DeBlock, director of marketing and product development for Nutraceuticals International, Elmwood Park, N.J. Carob powder contains sugar that may gum up machinery.
Carob powder may replace 100% of cocoa if it is used as color, Ms. DeBlock said.
"I have heard you can replace up to 50% of the cocoa, if cocoa is used as a flavor," she said.
Carob powder comes in light, medium and dark types.
"The lighter the powder, the sweeter the taste," she said. "The darker the powder; the more bitter the taste."
Unsweetened carob powder may be naturally sweeter than cocoa powder, but carob is not as flavorful as chocolate, Ms. DeBlock said.
"However, because carob has no fat and lots of sugar, adjustments will have to be made to those ingredients," she said.
This article can also be found in the digital edition of Food Business News, October 13, 2009, starting on Page 1. Click