We begin our discussion of the cocoa market with an observation. On October 15 – the day before the release of European grind data – December cocoa settled at $2,354 per tonne (Chart 1). The grind results were dismal, but better than expected. Third-quarter grindings were down 16.2% year-over-year. Analysts had expected a decline of 15% to 20%. Similarly, a couple of days later, the North American figures came in down 2.19%, “better” than analysts’ guesstimates of a decline between 3% and 10%. Traders actually bid the market up by $1,500 per tonne, allegedly relieved that the numbers were not worse.
The rally was lost, but the market has had four weeks to absorb the implications of falling demand implicit in the grind numbers, but prices are holding above the pre-grind level. Commodities in general – the other softs, energy, base metals, and now grains – have experienced a broad selloff, so it pays to take note of markets that might be bucking the trend.
As far as the European grind is concerned, one large German processor claims that its results were omitted completely from the survey. Although there were no hard figures accompanying this news, it does seem that the total European grind would have been considerably higher with the inclusion of the missing grinder. And this explains, at least in part, why the market had such a bullish reaction to what was ostensibly bearish news.
While the harbinger of cocoa demand is grinding activity, the trend in end-product prices may be the true leading indicator of consumption. Over the past few months, we’ve pointed out that the price of cocoa butter has been rising. The European butter/bean ratio has now jumped to 2 times the spot London bean price. Supplies have been run down and the market for the end product is robust. Asian ratios are not quite as strong, but have also risen to 1.6. While powder prices have slipped, the combined ratio is still trading near multiyear highs (Chart 2). The ability of bean prices to maintain current levels could very well mean that bean purchases by processors are stronger than grinding activity allows us to believe. That’s partly because the reporting mechanisms are flawed – as illustrated – and partly because origin-country grindings are also not reported accurately.
In any case, the demand side is showing signs of life, and the production side will not be able to keep up, if in fact consumption growth is larger than the market believed was possible.
The 2011-12 crop year for West African cocoa is over, and the final results show that output in the world’s two largest producers was lower than in the previous season. There are conflicting estimates regarding the amount of final Ivorian arrivals. The average estimate is about 1.45 million tonnes, compared with 1.51 million tonnes in 2011-12. Early arrivals are running about the same as last year at this time.
Ghana – the world’s second largest producer – harvested an extraordinary crop in 2011-12 of over 1 million tonnes, 25% to 30% above what it had been producing in prior years. The 2011-12 crop slipped back to 880,000 tonnes, and the government forecast for the 2012-13 marketing year that began recently is for a further drop to 800,000 tonnes.
With less than two months of arrival data available, it is much too early to forecast the 2012-13 West African crops. We usually get a better idea in mid-December when we reach the half-way mark of the main crop. At least one analyst is forecasting a 150,000-tonne production/consumption deficit for 2012-13, up from 100,000-tonne surplus this past marketing year.
The market received an unexpected boost from a political event. On November 14 Ivorian President Alassane Ouattara announced that he was dissolving the government. December cocoa jumped $81 per tonne. Not that there is any known connection between the current government’s policies and low cocoa prices. Rather, traders have vivid memories of 2011 when the government-free country experienced chaos, which resulted in the withholding of 500,000 tonnes of cocoa beans.
The onus is on producers to meet better-than-expected demand. Roll December long positions to March, maintaining stops at $2,300, close only.