Ron Sterk

Cocoa bean futures sank to fresh multi-year lows in New York and London last week in part on ample supplies. At the same time, the cash markets for cocoa powder and cocoa butter remain unsettled if not in outright disarray after bankruptcies by processors in the United States and Germany last year and disruptions in top-producing Ivory Coast.

Nearby cocoa bean futures on ICE Futures U.S. that had traded above $3,000 a tonne as recently as August 2016 fell below $1,900 a tonne for the first time in eight years (nearby continuous basis) early last week, down 10% from the first of the year and down more than 30% from a year earlier. Cocoa bean futures in London, which have been on a rollercoaster since Britain’s vote to leave the European Union last year, fell to five-year lows.

New York cocoa beans
Cocoa bean futures sank to fresh multi-year lows in New York and London last week in part on ample supplies.

In addition to ongoing speculative selling (speculators’ net short position in New York was the largest since April 2012 as of Feb. 7), forecasts for a large global cocoa bean surplus in 2016-17 (October-September) have provided broad pressure for several months. Also adding underlying pressure has been uncertainty about global cocoa demand, with numbers from China especially below earlier somewhat optimistic expectations. 

While bearishness in cocoa bean futures may be traced to a couple of key factors, the cash markets seemingly have been barraged by an array of factors. The disruption began in Germany when Euromar Commodities GmbH declared insolvency in early December 2016, followed by the Chapter 11 bankruptcy filing of New Jersey-based Transmar Commodity Group Ltd. in late December. Both processors are part of Transmar Group Ltd. The German facility is expected to end up in strong hands as several competing processors are vying for the plant. On the U.S. side, Transmar has indicated it will make good on contracts, but buyers aren’t so sure and have been seeking supply from other processors. That demand has provided a bit of support to the cash market as part of Transmar’s financial woes were the result of forward contracted material at low prices that it could not deliver when prices surged last summer, according to documents filed with the court.

Cocoa powder prices quoted by Sosland Publishing Co. have trended lower but have been less volatile than cocoa bean futures. Values for basic 10% to 12% butterfat powder were 90c to 95c a lb in early February, down about 25% from a year ago. Cocoa butter prices quoted by the Cocoa Merchants of America Association were around $5,200 a tonne in early February, down about 15% on the year.

Cocoa product prices chart


As messy as markets are in Europe and the United States, the situation is in disarray in West Africa. After several years of relative quiet, the Ivory Coast military (which helped the current government get into power) mutinied in January because promised bonuses had not been paid. That situation has not broadened into a country-wide war, but the quiet is uneasy and casts an ominous cloud over the market as traders remember civil war not too many years ago.

New price pressure the past couple of weeks resulted from delivery defaults on several hundred thousand tonnes of cocoa for export from the Ivory Coast that had not been adequately hedged at the time of sale last year. That material is expected to come to market at prices lower than initial contracts indicated, adding price pressure to already ample supply. Adding confusion in the market, trade sources said, have been widely varying reports by Bloomberg and Reuters about the amount of cocoa beans arriving at ports for processing or export.

While most analysts believe cocoa bean futures are at or near a bottom, futures through 2018 were under $2,100 a tonne last week, and the general disarray in all segments of the market will at a minimum maintain uncertainty in the foreseeable future.