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Cocoa set for turnaround as strong demand signals small shortage

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The world's largest cocoa producers could soon get some relief from falling prices that dragged West African economies into a crisis.

[CHICAGO] The world's largest cocoa producers could soon get some relief from falling prices that dragged West African economies into a crisis.

After two years of bumper crops resulted in global surpluses, the market is starting to turn around. Strong demand is expected to result in a slight deficit of 50,000 metric tons in the season that starts Oct 1, according to the median estimate in a Bloomberg survey of 10 traders, brokers, analysts and cocoa exporters.

The more balanced market will help farmers in top producer Ivory Coast, which last year was forced to cut the minimum price it paid farmers after a wave of defaults by local exporters compounded a global surplus. In Ghana, the cocoa regulator found it harder to balance its books as it maintained farmer prices at a time of plunging futures in London and New York.

It "looks like a balanced year, with another round of excellent main crops in West Africa," said Carlos Mera, an analyst at Rabobank International in London. "But we also expect demand to continue to increase."

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Cocoa futures traded in London are down about 40 per cent from a 2016 peak, prompting measures by Ivory Coast and Ghana that they say will give them more sway in the markets. Both nations plan to announce the price paid to farmers at the same time.

Ivory Coast will produce 2 million tons of cocoa next season, little changed from a year earlier, according to the Bloomberg survey. Production there grew as higher prices from 2012 to 2015 spurred growers to expand planted area, much of which is in protected forest areas. In Ghana, output will come to 877,000 tons, also at similar levels to this season, the survey showed.

While traders are expecting bumper crops as hopes fade for an El Nino weather pattern that could contain production, high processing margins will help global grindings advance 3 per cent, according to the Bloomberg survey. That would be a third year of increases.

Ivory Coast, which sells most of its crop before the season starts, benefited from higher prices earlier this year and people familiar with the matter say the nation is planning to raise the minimum price paid to farmer to between 750 CFA francs (S$1.81) and 800 francs per kilogram. That's in line with the 750 CFA francs median estimate of 9 participants in the Bloomberg survey.

"A lot of attention will be placed on the increase in fixed prices paid to farmers in Ivory Coast," Mr Mera said. "And also to any coordination between Ivory Coast and Ghana, which we in principle expect to be limited to simultaneous price announcements."

BLOOMBERG