Olam sees El Nino-hit cocoa in biggest deficit in 30 years

[LONDON] Dry weather damaging crops from Ivory Coast to Indonesia will widen the global cocoa shortage to the highest in than three decades, according to Olam International Ltd, the third-largest processor of the beans.

World production will fall short of consumption by 308,000 metric tons in the 2015-16 season ending in September, said Amit Suri, the chief operating officer of the company's cocoa unit. That would be the most since the 1980s and up from 122,000 tons forecast in January. Dryness has since curbed the outlook for the smaller of two annual crops in top growers Ivory Coast and Ghana.

"It's never happened in my 20 years of cocoa that we've seen supply and demand change so dramatically so late in the year," Mr Suri said in an interview at Olam's offices in London. "The supply problem is much more widespread and has come much later in the year and we don't think people are watching that."

Cocoa futures in London jumped 19 per cent in the past year as an El Nino weather pattern hurt crops from Ecuador to Indonesia. Ivory Coast farmers will harvest a crop 14 per cent smaller than a year earlier, while output in Ghana will be unchanged, Suri said. There's a risk that harvests could be smaller than Olam's outlook, which is based on tree crops instead of estimates of beans arriving at ports, he said.

The main harvest in Ivory Coast, which takes place from October to March, will be 35,000 tons less than predicted in January, while the estimate for the smaller mid-crop of April to September was cut by 75,000 tons, Mr Suri said. Ghana's mid-crop will be 30 percent smaller, he said, declining to provide total harvest figures for both countries.

In Brazil, output has "fallen off a cliff" to 160,000 tons, some 60,000 tons less than previously thought, Mr Suri said. The Singapore-based trader also cut its crop forecasts for Indonesia and Ecuador while raising them for Nigeria and Cameroon. The total production estimate was cut by 230,000 tons he said.

"We are generally concerned about both the physical supply and how the market reacts to it because we think a lot of this is not factored in," Mr Suri said. "It's scarier than it's apparent in the market today. We don't think the market is taking a global perspective."

Smaller crops may not be the only problem the market will face. Bean quality is deteriorating and that will exacerbate shortages because processors will find it hard to grind due to a lack of higher quality cocoa to blend them with, he said. The low-quality beans being harvested this season will need to be carried into next year, when better supplies will become available.

"For the physical usage, for the market, you have availability of cocoa reducing by about 400,000 tons," Mr Suri said. "There is a deficit for cocoa but there's a larger deficit for quality cocoa."

Pod yields for the mid crop are about a quarter smaller than at the same time last year, he said. Pods are coming out smaller and maturing earlier because of the dry, hot weather, while beans coming out of them are very small with high waste levels, he said. The recent quality and what's anticipated in the summer is likely to be worse, he said.

Global cocoa processing will expand 1 per cent this season, less than the 2 per cent previously expected, partly because of limited supplies in producing countries, he said. While there's a risk that grindings will remain unchanged, that would still lead to a deficit of 265,000 tons, he said.

"People are looking at grind as a consumption indicator, which is true in a year in which there's surplus, but when there's a supply crunch it has to be seen as an indicator of product supplies," Mr Suri said. "People need to look beyond beans this year."

BLOOMBERG