Cocoa: Bearish demand, bullish supply

While the poor quality is mostly a result of weather, it is also related to failed government reforms. Falling prices have not facilitated the forward selling program quite the way the government had anticipated. The minimum prices paid to farmers has fallen and the incentive to switch from cocoa to more profitable crops, such as palm and rubber, has increased.

Ghanaian output, as measured by exporter purchases, is 16.8% below last year at this time, which is substantially below the government’s estimate for a 5% drop. Cameroon was a minor player in West Africa, but had set a goal to grow 250,000 tonnes of beans. In 2010-11 that target was almost reached with output of 240,000 tonnes. The following year, however, disease and infestation reduced the crop to 220,000 tonnes. This year, primitive drying practices have resulted in rejection of beans by European buyers. We do not have an accurate estimate, but it would seem that output will fall again.

So while demand is in fact extraordinarily bearish, new supply flows from the major producing nations, as illustrated, may very well be in a perpetual decline. This has kept the global balance sheet from flying into an unchecked surplus. The International Cocoa Organization (ICCO) recently forecast a production/consumption deficit of 45,000 tonnes. This compares with last year’s 86,000-tonne surplus. That’s actually a conservative estimate. Some analysts are looking at a deficit of over 100,000 tonnes.

We were wrong about the demand side. However, the world’s supply sources remain highly vulnerable, both because of political instability and because of unsophisticated agricultural technology and financial planning.

We were stopped out of our long position at $2,300 per tonne. Stand aside, but stay tuned.

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