West African 2010-11 mid-crop harvests are winding down, and the output estimates are at record or near-record levels. Ghanaian production is now estimated at 1 million tonnes, far exceeding the previous record of 740,000 tonnes set in 2005-06. Ivorian port arrivals stand at 1.41 million tonnes, a record for this point of the season. Output in up-and-coming producer Cameroon shot up to 236,000 tonnes, beating the previous record of 210,000 set in 2008-09.
On August 26, to reflect these robust estimates, the International Cocoa Organization (ICCO) bumped up its estimate for the 2010-11 global surplus to 325,000 tonnes. That’s up from its previous forecast for a surplus of 187,000 tonnes and a dramatic shift from the 125,000-tonne deficit recorded for the 2009-10 marketing year. With ending stocks at 1.93 million tonnes, the stocks-to-consumption ratio jumps to 50.4% of usage, up from 43.4% at the end of 2009-10. Not a terribly bullish scenario.
There have been two bullish developments over the past couple of months. Aging plantations and disease are a problem in most cocoa regions around the globe, but the effects have not been as severe anywhere as they’ve been in Indonesia. Output estimates for the current season have fallen to as low as 400,000 tonnes, compared with 530,000 tonnes in the previous season. It would seem that the forecast for such a large global surplus may not yet have accounted for the steep drop in Indonesian production.
Second-quarter cocoa grind statistics for non-origin countries were very strong. Europe was up 8.3% year-over-year, North American grind activity increased by 6.2%. Although these figures were above analysts’ expectations, it is very likely that they were so strong only because European and North American processors were merely compensating for capacity lost temporarily during the standoff in the Ivory Coast. As such, it will be very interesting to see how third-quarter results – the period after the Ivory Coast got back on its feet – will turn out. That data will not be released until mid-October.
Studying fluctuations in butter/bean ratio values to determine whether grinding is profitable may have become somewhat archaic. Whatever significant growth there is in chocolate consumption is to be found in developing countries, which generally use a much higher ratio of powder to butter in manufacturing chocolate. There has been a powerful surge in powder prices over the past few years. Although butter prices have languished, powder prices have compensated. The combined price of butter and powder has gained steadily over the price of beans since mid-2010
The advent of the powder market has been supporting demand and helps to decipher – at least in part – the enigma of how cocoa prices remain steady at multi-decade highs.
It is, we believe, highly unlikely that crops in Ghana shot up by such a wide margin in such a short period of time, while at the same time, neighboring Ivory Coast was able to crank out a bumper crop despite the fact that the industry was virtually shuttered for months during the main-crop season.
A plausible explanation is that smuggled beans were double counted. Smuggled beans usually move from Ghana to the Ivory Coast to take advantage of higher prices, but went the opposite direction this year, as Ivorian farmers became frustrated by earning no income at all.
The Ivory Coast data are somewhat more believable because it has produced crops of similar size in the past and the arrival data published by the government matches – more or less – the parallel figures provided by exporters. Ghana has never produced anywhere near the amount of beans the official agency Cocbod is reporting and there is less transparency as we don’t see the weekly numbers provided by exporters to the government. Aside from musings in press reports, there is no evidence to corroborate this theory. Time will tell.
As a result of our skepticism, we question forecasts that call for such a healthy surplus. As well, it’s hard not be impressed with the action of a market that has been generating nothing but apparent bearish news.
We’re a bit offside on our June 29 recommendation to establish long positions. Place stops at $2,800, basis nearest contract, close only.