Relief or grief?

by Ron Sterk
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KANSAS CITY — Much like prices for the major grains and oilseeds, values of other ingredients, especially cocoa and sugar, are high going into the new year with little letup expected any time soon. Politics, court decisions and of course weather all will be critical in determining if buyers get some price relief or more price grief.

Perhaps the easiest ingredient to “forecast” is cocoa, in which 2011 appears to be more of the same — tight powder supplies and historically high prices amid ample cocoa butter stocks.

Weaker demand during the economic downturn for higher-priced chocolate, which utilizes cocoa butter, resulted in heavy butter stocks that prompted processors to reduce operations, which in turn resulted in tight supplies of cocoa powder since about the same amount of cocoa butter and powder are produced in the grinding process. In recent weeks cocoa cake (which is ground into powder) prices have moved above cocoa butter prices in some areas for the “first time in memory,” one trader noted. Although cocoa processors in the United States appear to be running “full out” on production capacity, some Asian processors still are limiting output because of heavy butter stocks.

Additionally, political tensions in the Ivory Coast, which provides about 30% of the world’s cocoa supply, have had the trade on edge as violence may quickly, albeit temporarily, slow exports from that country. The past weekend was expected to be critical for the political situation as violence erupted late last week when newly elected president Alassane Ouattara attempted to take office but incumbent Laurent Gbagbo, with backing from the military, resisted.

Cocoa bean futures prices in New York spiked to four-month highs above $3,100 a tonne early in December following a Nov. 28 presidential run-off election in the Ivory Coast. Prices eased at mid-month in December but firmed again last week.

Prices for 10% to 12% natural cocoa powder moved above $2 a lb in January 2010 and currently range from $2.15@2.30. Bookings for 2011 have held at those levels, as have limited sales into 2012. Domestic cocoa processors last week were booking powder sales for the second half of 2011 with some already sold out of potential production through the first half of the year. Because of the strong sales, traders see more opportunity for further price advances as processors fill capacity for the year. Prices for some alkalized powder rose again last week.

Even though some buyers have been reluctant to book cocoa powder for all of 2011 at current price levels, processors have strongly encouraged them to do so now rather than book later based on “forced availability” at even higher prices. “There are no signals of fundamental change” that would indicate lower prices in 2011, one trader noted.

The outlook for sugar is perhaps more complicated with strong demand, unsure domestic and global supplies and a pending California court case that has cast doubt on growers’ ability to plant bioengineered sugar beet seeds, which accounted for 95% of 2010 U.S. sugar beet acres, reduced input costs and boosted production compared with conventional sugar beet seed. Currently, a California district court has said no to use of the seeds pending a full-blown environmental impact study from the U.S. Department of Agriculture, which is not expected until May 2012.

“At this time U.S. sugar beet growers do not know which type of seed they will plant next spring or spring 2012,” the U.S.D.A. said in its Dec. 14 Sugar and Sweeteners Outlook. “Whether enough conventional seed is available to completely plant the normal spring beet crop is unclear. The uncertainty surrounding the 2011 sugar beet crop has already affected the raw sugar futures markets and is contributing to the relatively negative outlook on 2011-12 sugar supply.”

One trader suggested growers likely will plant what conventional sugar beet seeds they have in 2011 to be “safe” as long as the bioengineered court case is unsettled. But he added the net result would be lower production.

While sugar markets last week were in their typical holiday lull, buyer inquiries about 2011-12 were mostly related to supply uncertainty due to the court case. Some beet processors previously had sold about 50% of potential 2011-12 output but have since withdrawn from the market, again because of supply uncertainty.

Near-term sugar supply in the United States is a bit more certain. U.S. bulk refined beet and cane sugar prices were quoted at a historically strong 57c a lb f.o.b. through the end of the year, at 55c from Jan. 1 to Sept. 30, 2011, and at 48c for 2011-12, which begins Oct. 1, 2011. Nearby New York domestic raw sugar futures were trading over 37c a lb, also near historical highs.

In the United States supply has improved largely because of sharply higher imports from Mexico, where production in the first seven weeks of the 2010-11 season were up 52% from a year earlier. Sweeteners may flow freely between the two countries under the North American Free Trade Agreement, and current price relationships favor sugar exports north and high-fructose corn syrup exports south.

But even with the strong supply from Mexico, traders said they foresee little chance for lower refined sugar prices in the United States because many beet refiners already have sold 90% or more of their potential 2010-11 production and have little incentive to discount.

Price relationships between domestic raw and world sugar prices, with U.S. cane refiners supplementing domestic cane production with global supply, also point to continued

strong domestic values. Weather-related supply issues in top producer and exporter Brazil, top consumer India and major exporter Australia have created uncertainty about 2010-11 supply and prompted some to forecast a third consecutive year of global sugar supply deficit.

“The ability of world production to get ahead of world consumption has been limited,” one trader said. “If we have any weather issues going forward, we could see price impact due to minimal stocks.”

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