Weakening demand seen pressuring cocoa prices in 2008-09

by Ron Sterk
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KANSAS CITY — As harvest of the 2008-09 main-crop cocoa begins in Western Africa in less than a month, the industry is facing uncertain supply prospects, high prices and weaker chocolate demand.

Although global cocoa production remains in a deficit to consumption in 2007-08, as forecast by the International Cocoa Organization (I.C.C.O.), there appears to be no shortage of cocoa. Traders expect cash cocoa powder prices will hold near current levels or weaken through 2009.

"My biggest concern is demand in 2008-09," Judith Ganes-Chase of J. Ganes Consulting, L.L.C., Katonah, N.Y., said. She noted that several major manufacturers have increased prices, decreased bar sizes, or both, with smaller bars especially having a negative impact on demand, which already was declining.

Currently U.S. prices for 10% to 12% natural cocoa powder range from 80@90c a lb, 45% to 53% above year-ago values. Prices for higher quality cocoa have increased even more because of demand for premium and dark chocolate, which also has shown signs of waning during the current economic slowdown.

Higher cocoa prices have been passed on to consumers, with The Hershey Co., as one example, raising wholesale prices about 10% in August on top of an average 13% increase in January, although higher prices for other ingredients also contributed to the need for the increases, the company said. Hershey also reduced bar sizes, Ms. Ganes-Chase noted.

Cocoa futures prices peaked at $3,385 a tonne in New York on July 1, closing at a 28-year high of $3,360 that day. Prices have traded mostly in a range of $2,600 to $2,900 for most of August. A year ago the "continuous" nearby contract was $1,820 a tonne.

"Indeed, cocoa prices had recorded an upward trend from the beginning of the 2006-07 cocoa season until June 2008, when they reached a level twice as high," the I.C.C.O. said. Cocoa prices declined 15% by late July from early July highs.

Most traders regularly contacted by Food Business News said cocoa futures prices indicate little additional upward potential for cash prices. Late last week the September 2008 through December 2009 New York futures contracts were within $30 for all months. That basically "flat" pricing gave little incentive to buyers to book cash cocoa powder or other products far into 2009, the traders said. Coverage of prospective cocoa needs for 2009 are estimated near 50%, with coverage in the first half of the year much heavier than in the latter half, they said.

One trader said users also were in no hurry to buy into next year because of indications of easing cocoa demand. Ms. Ganes-Chase agreed and suggested weak cocoa demand could pressure futures.

But buyers also were not pushing sales because of uncertainty about the size and quality of the new crop and the lack of pricing incentives in forward periods.

With 70% of the world’s cocoa bean production originating in West Africa, including 40% to 45% in the Ivory Coast, the trade closely watches weather, crop health and political developments in the region.

U.S. quarterly cocoa grind saw the largest year-over-year decline in the second quarter of 2008 in more than six years. The National Confectioners Association said 80,415 tonnes of cocoa beans were ground in the second quarter, down 15.9% from the same quarter a year earlier, when grind was down 8.8% from 2006. Quarterly grind has declined from the same period a year earlier for six consecutive quarters, according to N.C.A. data. The last increase was in the fourth quarter of 2006 when grindings were up 3% from October-December 2005.

Global cocoa grindings earlier were forecast by the I.C.C.O. to be a record high 3.7 million tonnes in 2007-08, up 2.4% from 2006-07. But the organization has since reduced its forecast grindings to 3.6 million tonnes.

Chocolate confectionery consumption in major developed countries increased 14% between 1997 and 2006, less than 2% annually, the I.C.C.O. said. The I.C.C.O. also noted that the amount of cocoa consumed has increased at a faster rate than chocolate the past couple of years because of increased demand for dark chocolate, which contains more cocoa than traditional milk chocolate.

Because of high prices and easing demand, consumption in 2008-09 could fall for the first time since 2001-02, Ms. Ganes-Chase said.

Cocoa bean production in the current year (2007-08), which ends Sept. 30, is forecast at about 3.65 million tonnes, up 7% from 3.4 million tonnes in 2006-07.

The I.C.C.O. forecasts a global deficit (production versus use) of 88,000 tonnes this year, much smaller than the 293,000-tonne deficit in 2006-07 and compared with a surplus of 215,000 tonnes in 2005-06.

Although the trade talks about a "deficit" when cocoa demand exceeds production, global cocoa stocks as a per cent of use are large compared with most other commodities. Stocks have been around 1.5 million tonnes since the early 1990s. The stocks-to-use ratio has not been below 40% since 1985-86 but is considered "in balance" when compared with a ratio that didn’t go below 60% in the late 1980s and early 1990s. A stocks-to-use ratio of 30% is considered tight by the industry.

This article can also be found in the digital edition of Food Business News, September 2, 2008, starting on Page 1. Click here to search that archive.

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