Asia's taste for chocolates to ice cream seen rising on incomes

[KUALA LUMPUR] Cocoa demand will keep climbing in Asia as increasing incomes boost the consumption of chocolate bars, ice cream and drinks, according to J. Ganes Consulting LLC.

"The potential is there" as the middle class expands, said Judith Ganes-Chase, the founder of the company who has studied agricultural commodities for more than 25 years. Demand in the region will grow by 8 percent annually in the next 10 years, said Fay Fay Choo, cocoa director for Asia at Mars Inc.

Cocoa futures advanced to the highest level since 2011 in New York in September. The beans are ground into butter, which accounts for as much as 20 percent of a chocolate bar's weight, and powder, used in ice cream, soft drinks and cookies. As costs climbed and economic growth slowed in Europe and China, processing declined from the US to Asia.

"The grind is hurting, no one's making money, so they're not grinding," Ms Ganes-Chase said in an interview in Singapore on Thursday. "Does that mean that the end user, the final consumer is not loving chocolate more and more and buying more and more? No, they're absorbing stocks, they're absorbing a lot of the excess inventory and supply."

Grinding in Europe fell 1.6 per cent in the first quarter, the European Cocoa Association said on April 16. The drop was 5.8 per cent in North America, according to the National Confectioners Association. Processing in Asia decreased 12 per cent, a Bloomberg survey showed. The Cocoa Association of Asia is set to release the data on Friday.

The decline in processing has hurt bean prices that fell 7.3 per cent in the first quarter after a 12 percent slump the previous three months. Cocoa closed at US$2,802 a ton on ICE Futures US in New York on April 23, down 18 per cent from the high of US$3,399 in September. Butter has dropped 30 pervcent from a six-year high of US$8,594 a ton in August.

An increase in grinding capacity in Asia has also curbed processor margins, reducing demand for beans.

"The problem is that you've got a lot of capacity," Ms Ganes-Chase said. "In the beginning when the capacity was built up, everyone was fighting for market share. They went from having a shortage in capacity to oversupply."

Developed capacity in Indonesia, the world's largest grower after Ivory Coast and Ghana, reached 539,000 tons last year, according to a presentation by Soetanto Abdoellah, chairman of the Indonesian Cocoa Board, at a conference in Singapore this week. Grindings were 322,000 tons in 2013-2014, it showed, citing International Cocoa Organization data.

Capacity was built "in anticipation of probably where the demand is going to be in 10 years," Ms Ganes-Chase said. "It wasn't just for cocoa. Everyone was sold on the idea that Asia was going to be the outlet for solving the world's oversupply of commodities and for a while it was working because China was absorbing everything."

Growth in China has decelerated, with the world's second- largest economy expanding last year at the slowest pace since 1990. The slowdown may cut demand for luxury items such as chocolate, said Hamish Smith, a commodities economist at Capital Economics in London. Cocoa demand in 2015 will increase at the weakest pace in six years, Rabobank International has predicted.

The region will lead growth in demand for cocoa and chocolate in the long run, said Ms Fay Fay Choo from Mars, the closely held maker of M&M's candies.

"People in emerging economies are becoming more middle class," she said at the conference. "Once they taste good chocolate, they don't go back and eat bad chocolates again."

BLOOMBERG