Cocoa: Bearish demand, bullish supply

The prices of butter and powder, the two main products of cocoa beans, often move in opposite directions. The two individual markets can be very volatile, but when added together, the price has been relatively stable over the years (Chart 3).

When the combined ratio moved to the top of its range twice over the past two years, we believed that processors would increase bean purchases. But powder prices have collapsed in a serious way (Chart 4), which leaves little incentive to process any more than hand-to-mouth requirements. The collapse in profit incentive seems to explain the slow growth of grinding activity.

Ivorian farmers are harvesting the tail end of the main crop. Port arrivals stand at 939,000 tonnes, 6.6% behind last year at this time. It was a very dry season, which has resulted in inferior quality beans. Bean quality is determined by size. The acceptable level is a maximum of 105 beans per 100 grams. Many beans have been coming to port at 115 beans per 100 grams and are being rejected by exporters. Smaller beans are typically harvested from the mid-crop, but having such small beans as part of the main crop means that the volumes of arrivals are not an accurate reflection of supply.

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