Oxstones Investment Club™Global cocoa supplies are headed for the longest production shortfall in more than five decades as chocolate demand surges in Asia.
Cocoa use will top output by about 70,000 metric tons in the 12 months started Oct. 1 and deficits will persist through 2018, a six-year stretch that would be the longest since the data began in 1960, said Laurent Pipitone, head of statistics at the International Cocoa Organization in London. Prices may rally 15 percent to $3,200 a ton by the end of 2014, according to the median of 14 trader estimates in a Bloomberg News survey.
Global sales of chocolate confectionary will gain 2.1 percent to a record 7.3 million tons next year, after a 2 percent gain in 2013, estimates Euromonitor International Ltd. Sales in China more than doubled in the past decade, outpacing gains in Western Europe, the biggest consumer. Tighter supplies will mean higher costs for food makers including Nestle SA, Barry Callebaut AG and Lindt & Spruengli AG.
“Demand for chocolate is great,” said Ashmead Pringle, the president of Atlanta-based GreenHaven Commodity Services, which oversees about $340 million. “A lot of the world population is moving to the middle class and will have more money to spend, in particular inemerging markets and Asia.”
Cocoa climbed 24 percent this year to $2,771 a ton on ICE Futures U.S. New York, the second-biggest gain among the 24 commodities tracked by the Standard & Poor’s GSCI gauge, which slid 3.4 percent. The MSCI All-Country World Index of equities gained 16 percent, while the Bloomberg Dollar Index, a gauge against 10 major trading partners, rose 3 percent. The Bloomberg Treasury Bond Index fell 2.8 percent.
Smaller Harvests
Dry weather in Ivory Coast and Ghana, the biggest cocoa growers, drove price gains this year even as most commodities slumped. Commerzbank estimates the production declines in West Africa mean this year’s deficit may exceed 100,000 tons, or 43 percent more than the ICCO forecast. Cocoa beans are processed into butter and powder used to make chocolate.
In the Asia-Pacific region, home to more than half the world’s population and 12 percent of chocolate demand, each person will eat 200 grams (0.4 pounds) in 2014, double the amount of a decade earlier, according to Euromonitor. Sales in China will rise 6.9 percent to a record 193,100 tons this year and expand 6.6 percent further in 2014, the researcher said.
Asian demand is dwarfed by the 2.2 million tons eaten last year in Western Europe, where per-capita consumption was unchanged from 10 years earlier at 4.5 kilograms. Euromonitor predicts sales in the region will rise 0.5 percent this year before expanding 0.6 percent next year.
‘Untapped Market’
China is a “huge untapped market” that signals more potential for cocoa-supply shortages, said Claudio Oliveira, the head of trading at Castlestone Management LLC in New York.
The world population will expand by 1 billion people over the next 12 years to 8.2 billion, before reaching 9.6 billion by 2050, the United Nations said in a June report. China and India will remain the most-populous nations, and most of the future growth will be in developing countries, the UN said.
Farmers in West Africa, which accounts for about 70 percent of world output, are struggling to boost production as aging trees curb yield potential, said Francesco Gibbi, a project manager at the Common Fund for Commodities, set up by the United Nations.
In Ghana, the largest grower behind Ivory Coast, old trees that yield fewer beans cover about 30 percent of planted areas, and it takes about three years for new ones to be productive, Gibbi said. The government also said in August it will cut the use of subsidized pesticides by half in the season that began Oct. 1, raising the risk of pest damage that the ICCO said damages as much as 40 percent of the global crop annually.
Ample Rains
While drier-than-normal weather may have hurt the crop that’s currently being collected, ample precipitation will boost the next harvest. Ivory Coast growers gather cocoa twice annually, with 70 percent of production supplied by the larger main crop and the rest by the mid-crop.
In November, the country had as much as double the normal rainfall, helping replenish soil moisture, David Streit, an agricultural meteorologist at Commodity Weather Group in Bethesda, Marylandsaid in a telephone interview. Ghana had as much as 25 percent above normal rains, he said.
Since the start of the season on Oct. 1, bean deliveries to ports in Ivory Coast were estimated to have risen to 711,000 tons as of Dec. 15, from 498,000 tons a year earlier, according to data on the website of KnowledgeCharts, a unit of Commodities Risk Analysis in Bethlehem,Pennsylvania.
“We’re just finishing harvesting the main crop, and that was very good,” Adrien Koffi Kauadio, who farms 4 hectares (9.9 acres) in Gbogue, Ivory Coast, said in a Dec. 11 interview in London. “If the rains come, we could also have a good mid-crop.”
Margins Narrow
Cocoa accounts for about 10 percent 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.
Nestle SA (NESN), 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. Since the end of June, cocoa prices are up 29 percent.
Hershey Co. is betting on rising consumption in Asia, building a $250 million confectionery plant inMalaysia, the region’s biggest cocoa grinder, to help meet its revenue target of $10 billion a year by 2017. Chocolate sales in China are now at about $1.5 billion, Chief Executive Officer John Bilbrey said on an earnings conference call in October.
Consumer Tastes
For Will Papa, the Hershey, Pennsylvania-based company’s head of research and development, meeting that goal will mean tailoring chocolate recipes to consumer taste in China, where the market is dominated by milky candies. Papa employs a team of 12 scientists and product developers in Shanghai to test new products with local residents, he said in an interview.
Sales of chocolate confectionary in the Asia-Pacific region will expand 5 percent annually for Minneapolis-based Cargill Inc., Job Leuning, the head of cocoa in Asia, said Dec. 4 in Jakarta. The company is investing $100 million to open a cocoa-bean processing plant in Indonesia, the third-largest grower. The plant is Cargill’s first in Asia, where demand is growing, and will have a capacity of 70,000 tons, he said.
Hedge funds still expect more price gains. The net-long position almost doubled in the past year to 77,556 futures and option contracts as Dec. 10, U.S. government data show. That’s within about 7 percent of an all-time high reached in November.
Delayed Expansion
Farmer compensation in Ivory Coast hasn’t kept up with the gain in futures as most of the crop was sold in the first half of this year, before prices rallied. The government said Oct. 2 that it will pay farmers 3.4 percent more for their beans in the main harvest of the season started in October. That means farmers probably won’t be able to ramp up production until after next year’s harvest, when they’ll receive higher prices and be able to invest in fertilizers and pesticides. Some are planting other crops, including rubber, farmer Kauadio said.
Stockpiles of cocoa at warehouses monitored by ICE Futures U.S. tumbled 36 percent since this year’s peak in June and are at the lowest since June 2011.
“There’s loads of evidence that the amounts of fertilizer, pesticides and spraying being done in both Ivory Coast and Ghana have fallen,” said Edward George, head of soft-commodities research at Lome, Togo-based lender Ecobank Transnational Inc., which finances the cocoa trade in West Africa. “Cocoa still has a long way to go. If you’ve been watching imports into China of chocolate, cocoa powder, cocoa butter, all that, they are rising exponentially. The trend isn’t changing, it’s just intensifying.”
To contact the reporters on this story: Luzi Ann Javier in New York at ljavier@bloomberg.net; Isis Almeida in London at ialmeida3@bloomberg.net; Marvin G. Perez in New York atmperez71@bloomberg.net
To contact the editor responsible for this story: Millie Munshi at mmunshi@bloomberg.net
Tags: China, chocolate demand, cocoa use, ghana, global cocoa supplies, global sales of chocolate, Ivory Coast, NESN, Nestle SA, The Hershey Co. (HSY)