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Cocoa market strengthens despite mixed grind data | 2020-02-14

Cocoa market strengthens despite mixed grind data | 2020-02-14
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WASHINGTON — Nearby New York cocoa bean futures hit 20-month highs in late January amid concerns about tighter global supplies even as port arrivals in top-producing Ivory Coast were ahead of the year-ago pace and fourth-quarter cocoa bean grind offered mixed signals about global demand.

The nearby March contract traded at a high of $2,859 per tonne on Jan. 22, up more than 25% from a year earlier. Futures traders have been concerned about dry conditions in West Africa, by far the world’s largest cocoa bean growing region. Prices have since backed off about 3% but remain well above year-ago levels. Deferred futures delivery months through 2021 are at a discount to nearby contracts, possibly suggesting less concern about supply next year (2020-21).

The International Cocoa Organization (I.C.C.O.) estimated 2018-19 (which ended Sept. 30, 2019) global cocoa bean production at a record 4,834,000 tonnes, up 3.9% from 4,651,000 tonnes in 2017-18 and up 10% from the prior five-year average. The I.C.C.O. has not issued its 2020-21 forecast.

Traders indicate cocoa powder users, including bakers, baking mix and chocolate milk mix manufacturers, are well covered through the first half of 2020 and mostly well covered in the second half of the year, although some large sales still were noted for the July-December period in late January. Many buyers also have at least some coverage into 2021. Lower futures values may offer mixed signals, encouraging some buyers to lock in coverage to take advantage of the discount but prompting others to wait amid a lack of upside price urgency.

Some buying urgency may have been dampened as prices for 10% to 12% natural cocoa powder and certain other grades have weakened about 4% since the first of the year. Cocoa butter prices have remained firm, maintaining a constant percentage value of about 2.5 times futures (the butterfat ratio), which has made butter more valuable as futures advanced. Cocoa powder prices typically move at an inverse to butter, and powder values have weakened, presenting powder buying opportunities for some but encouraging other buyers to wait to see if prices fall more.

Global October-December cocoa bean grind — an indication of demand — varied widely compared with the same quarter in 2018, with North America down 6%, Europe down 1.1%, Ivory Coast up 4.4% and Asia up 9% (the latter largely due to increased grind capacity). Despite the lower numbers for North America and Europe, sources said cocoa demand continues to rise, increasing in each of the past three years, with the latest I.C.C.O. estimate for 2018-19 at a record 4,807,000 tonnes, up 4.6% from 2017-18.

While much of the recent futures’ run-up was related to weather, a $400-per-tonne living income differential (L.I.D.) on cocoa bean prices implemented by Ivory Coast and Ghana, the world’s second largest bean producer, has added uncertainty and volatility to the futures market.

The two countries, which account for more than 60% of global cocoa bean production, worked together last year on the L.I.D. to boost revenue for growers in both countries. The effort has been accepted by major cocoa processors and chocolate manufacturers, seeking to encourage sustainability and reduce child labor, despite mixed reviews as to whether it will make a difference for farmers in West Africa. Some in the trade expect the L.I.D. to result in excess production that will drive prices lower, some doubt the governments that control cocoa bean sales and exports in Ivory Coast and Ghana will properly administer the funds, and some expect much of the $400 L.I.D., which is added to the cocoa bean futures price, will be negated by reductions in other costs and fees for buying and exporting beans and products. About 1 million tonnes of cocoa beans have been forward sold by Ivory Coast and Ghana with the L.I.D. for the 2020-21 marketing year (beginning Oct. 1, 2020), which reduces the uncontracted supply available for next year, Reuters recently reported.

In addition to volatility in futures, the L.I.D. likely will mean higher cocoa and chocolate prices, The Wall Street Journal said, noting at least one major cocoa bean processor planned to raise prices in anticipation of the premium, while some may be waiting to see if the L.I.D. “sticks” before passing on higher prices.

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