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Cocoa: Bearish outlook seen

Aarati Krishnan

INTERNATIONAL cocoa prices have recently bounced off their lowest levels in 27 years. However, current prices hover around $784 per tonne, 47 per cent lower than levels in January 1999 and 15 per cent lower than the levels a year ago. Surplus world produ ction of cocoa, coupled with sluggish demand has tended to put cocoa prices under pressure over the past couple of years. A decision by the European Union early this year to allow chocolate makers to substitute up to 5 per cent of the cocoa content in ch ocolates with vegetable fat, has also impacted offtake.

In the crop year 1999-2000 (October to September), world cocoa production was estimated at 30 lakh tonnes, up from 28.08 lakh tonnes the previous year. This left the cocoa markets in surplus by 25,000 tonnes, with the stocks-to-grindings ratio at 44.1 pe r cent. The stocks-to-grindings ratio indicates the percentage of end-season stocks to annual consumption.

Though cocoa crop from Ivory Coast, the world's largest producer, is expected to decline by 2 lakh tonnes in the next crop year, this is expected to be offset by high carry-in stocks and higher output from other producers. A surplus situation is expected to continue over the next crop year.

The near-term outlook for prices continues to be quite bearish. December to April has traditionally been the period when the bulk of Ivory Coast's main cocoa harvest hits the market. But poor rains and political unrest in the country in the current year has delayed peak harvest to January 2001. With the bulk of the Ivory Coast harvest still to hit the market, cocoa prices are likely to remain subdued in the near term. The liberalisation of the Ivory Coast cocoa economy, which was initiated in 1999, acce lerated the downtrend in prices. Reforms are expected to continue under the new president in power since October.

For domestic manufacturers of chocolate, the steady downtrend in cocoa prices has resulted in margin expansion. Both Cadbury India and Nestle India have reported strong performance in the past two quarters. Both producers have used soft input prices to c ut back prices and introduce chocolates in low unit price packs. This has helped pep up volume growth in the category. With the outlook for cocoa prices expected to remain bearish, both players will continue to have larger surpluses to plough back into p romotional exercises.