Cocoa market exhibits unusual tendencies

by Ron Sterk
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Ron Sterk
Cocoa powder prices have declined as cocoa butter prices have dropped since the start of the cocoa bean marketing year last October. While those price relationships are typical, the overall market has demonstrated some unusual tendencies, in part due to active fund trading in cocoa bean futures at a time when global cocoa bean production is at a deficit and chocolate consumption has been sluggish.

Prices for basic 10% to 12% butterfat cocoa powder were quoted by this publication in a range of $1 to $1.10 a lb last week, down 20% from Oct. 1, 2015. Cocoa butter prices quoted by the Cocoa Merchants Association of America were at $7,430 a tonne as of Sept. 6, up 12% during the same period a year ago but down 7% from a 22-month high of $7,995 a tonne in mid-August. Powder prices have followed the traditional pattern of declining when butter prices rise over the longer period but not during the past four months as powder prices have held about steady while butter values fluctuated widely.

Nearly equal amounts of cocoa powder and cocoa butter are produced in the processing of cocoa beans, but processors focus on selling higher-value butter. Cocoa powder is used in baking mixes, cookies, chocolate milk, ice cream and many other applications, while cocoa butter primarily is used in the manufacture of chocolate (and certain cosmetics), although “compound chocolate” utilizes cocoa powder and vegetable fat in place of cocoa butter.

New York cocoa bean futures dipped below $2,800 a tonne to multi-month lows on Sept. 9, after the Ivory Coast’s Coffee and Cocoa Council threatened to cancel export contracts and resell for export as much as 250,000 tonnes of cocoa beans that were not hedged by domestic traders in an attempt to stop speculative activity by those traders in the world’s largest cocoa bean producing nation.

Futures for a time were supported by concerns about a global deficit this year, with the nearby New York contract trading at multi-year highs just below $3,400 a tonne last December. The International Cocoa and Coffee Organization raised its estimate of a global cocoa bean production shortfall to 212,000 tonnes in the year ending Sept. 30 from 180,000 tonnes forecast earlier, although a large global carryover typically over 40% all but assures the world won’t run out of cocoa beans any time soon. Still, trade sources indicated cocoa powder and cocoa butter supplies have been somewhat tight.

In addition to the latest export news from the Ivory Coast, support for cocoa bean futures has eroded in recent months as improved weather has boosted prospects for the Ivory Coast’s main crop, harvest of which typically begins Oct. 1. Still many of the day-to-day moves in cocoa bean futures largely are attributed to speculative trading, industry sources contend.

Contributing to tightness in supplies was the fact that this year’s (2015-16) Ivory Coast cocoa bean crop, especially the later “mid-crop,” was of poor quality, consisting of a large percentage of beans that were too small to grind without mixing with larger beans, of which there was a shortage.

Although most food manufacturers some time ago covered their needs for cocoa butter (in the case of chocolate) and cocoa powder (ahead of the fall and holiday baking season), there remains the issue of lackluster global chocolate demand, due in part to economic uncertainty in Europe and lower-than-expected growth in China. It will be interesting to see how the market reacts to an expected larger and higher quality cocoa bean crop in the new year that begins Oct. 1. There currently is little incentive to aggressively buy cocoa butter or powder with deferred cocoa bean futures at a discount to nearby contracts, although as has been seen in the past year, moves in futures tend to have limited impact on physical prices.
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