Cocoa (NYBOT:CCU13) is heading for its best quarter since 2009 as dry weather and crop delays in West Africa, the main growing region, send prices toward a two-year high and raise costs for chocolate makers.
Demand will exceed output by 119,000 metric tons in the 12 months starting in October, the first shortage in four years, according to Macquarie Group Ltd. Prices will enter a bull market, rising 5.8% to 1,750 pounds ($2,718) a ton in London by the end of 2013, the highest since September 2011, according to the median of nine estimates from traders surveyed by Bloomberg. Hedge fund bets on higher prices in New York are near a five-year high.
The main-crop harvest in Ivory Coast, the top producer, may be a month later than usual and MDA Weather Services says rain in southern growing areas has been more than 25% below normal. World output will drop 1.2% to a four-year low at 3.94 million tons in 2013-14, with 1.42 million tons from Ivory Coast, Macquarie estimates. The world confectionery market is worth $114 billion, and Commodities Risk Analysis estimates the industry uses as much as 75% global cocoa supplies.
“The dry period did start earlier than normal,” said Jonathan Parkman, co-head of agriculture in London at Marex Spectron Group Ltd., who has followed the cocoa market for more than 30 years. “To get the market to come down, we will need to see better weather than we’ve seen.”
Cocoa rose 13% since the end of June on NYSE Liffe in London to 1,654 pounds a ton, set for the best quarter since September 2009. The Standard & Poor’s GSCI gauge of 24 commodities gained 5.6% in the third quarter as the MSCI All-Country World Index of shares rose 4.9%. Treasuries lost 0.7%, the Bloomberg U.S. Treasury Bond Index shows.
London cocoa jumped 19.2% since March, with New York futures entering a bull market on Aug. 7 with a gain of 20% from the 14-month closing low on March 6. Cotton is the only other commodity in the S&P GSCI Agricultural Index in a bull market.
Money managers increased bets on rising prices in London for five consecutive weeks as of Aug. 6, with net-long positions reaching 46,601 contracts, the most since October, NYSE Liffe data show. Bullish wagers on ICE Futures U.S. in New York jumped 41% in the past four weeks to 44,658 contracts.
Ivory Coast harvests cocoa twice annually, with 70% of production supplied by the larger main crop and the rest by the mid-crop. Output in the 2013-14 season starting Oct. 1 will fall 2.4% from a year earlier, Macquarie says.
Dry weather in April and May slowed emergence of pods for the main crop, said Kevin Marcus, the founder of Marcus Weather in Passaic, New Jersey. More moisture is needed now to fill those pods with beans, increase their size and improve their quality. A large mid-crop meant trees used their resources to keep pods hanging, spurring further delays in the development of the next crop, he said.
A rally in cocoa may be capped as slowing economies dent chocolate demand. Chocolate sales in Western Europe may expand as little as 0.5% this year, compared with 1.5% last year, said Francisco Redruello, a senior food analyst at Euromonitor International Ltd. The London-based researcher previously forecast a 1.3% gain.
Cocoa processing in Europe from April to June fell 8.5% from the first quarter, data from the European Cocoa Association in Brussels showed. Archer-Daniels-Midland Co., based in Decatur, Illinois, reported a loss of $28 million in its unit that includes cocoa in the six months to June 30 from a profit of $211 million in the same period a year earlier.
Price gains also may be limited as three years of surpluses mean world stockpiles at the end of September will be 1.98 million tons, equal to half a year’s global output, Macquarie estimates. That would be the largest inventory since at least 1960, International Cocoa Organization data show.
Slower sales in the second half of the year may boost prices as Ivory Coast already sold most of its next crop, said Kona Haque, an analyst at Macquarie in London. About 1.05 million tons were sold by the end of July, 74% of the annual output forecast by Macquarie. A new marketing system instituted last year means most beans are auctioned from April to June instead of September to November, during the harvest, said Judy Ganes-Chase, president of J. Ganes Consulting in Panama City, Panama.
Nestle SA, the Vevey, Switzerland-based maker of Kit Kat and Crunch bars, said Aug. 8 that profit margins fell in the six months ended June 30 in its confectionery unit amid rising competition and increased spending on marketing in Latin America. Zurich-based Barry Callebaut, the world’s largest maker of bulk chocolate, said in a statement July 4 that sales in local currencies fell about 1.3% in the nine months through May 31, compared with a year earlier.
Cocoa accounts for about 10% of the average price of a chocolate bar, the ICCO estimates. One ton of cocoa makes about 7,250 chocolate bars of 100-grams (3.5 ounces) each, according to Commodity Risk Analysis, a researcher based in Bethlehem, Pennsylvania. Macquarie’s forecast for a shortage of 119,000 tons in the 2013-14 season is equal to the amount processed in North America in three months.
Delays to deliver cocoa from warehouses at the Belgium port city of Antwerp and recent damage to some bags certified by NYSE Liffe may help support prices. Depot officials in Antwerp were removing water-damaged bags earlier this month from a 9,000-ton batch, equal to about 6.4% of exchange supplies, said a person with direct knowledge of the matter. The extent of the damage is not yet known and NYSE Liffe declined to comment.
Stockpiles monitored by NYSE Liffe fell to the lowest in a decade in February. They dropped partly as higher Ivory Coast prices over London reduced the incentive for traders to grade beans for delivery to the exchange, said Andreas Christiansen, the managing director of Hamburg Cocoa & Commodity Office GmbH. That leaves the market vulnerable to squeezes, he said. Ivory Coast beans for delivery from October to December were offered by Le Conseil du Cafe-Cacao yesterday at a minimum price that’s about 22 pounds higher than in London.
Dry weather may persist in Ivory Coast growing areas in October and November, leaving soil-moisture conditions below normal, said Steve Silver, a meteorologist at Gaithersburg, Maryland-based MDA Weather Services. Parts of Ghana, the second- biggest grower, also have seen dry weather. West Africa accounts for 70% of world production.
“The most bullish commodity right now is cocoa,” said Sterling Smith, a futures specialist at Citigroup Inc. in Chicago. “The weather materially needs to improve, or we’re going to see more stress and greater losses over the next four to five weeks. If it doesn’t, we’re looking at a much bigger situation.”