Raw Input. Why cocoa is piping hot

What would we do if the world ran out of chocolate? This was the fear that haunted world cocoa markets for much of 2014, causing bean prices to rise over 5 per cent for the year, even as most other agri-commodities suffered a rout. This is, in fact, a hat trick for the commodity, which also made gains in 2012 and 2013.

A tight supply situation has been propelling global cocoa prices upwards for three years now. Data from The International Cocoa Organisation (ICCO) show that even as the world cocoa crop shrank by 5 per cent in 2011-12 and by 3.7 per cent in 2012-13 (the cocoa season is from October to September), grindings (which indicate consumption) grew by 1 and 3.5 per cent respectively for the same years.

In the just-concluded season (September 2014), production rebounded by 10 per cent, but then demand has grown too. In the upcoming year 2014-15, some forecasters again expect the cocoa markets to face a deficit upwards of 1 lakh tonnes.

As with most other commodities, the rising global demand for cocoa is driven mainly by expectations of higher consumption in the Asian markets of China and India. One study has it that, while the average consumer in Germany, the UK and Switzerland consumes anywhere between 9 and 11 kg of chocolate per year, Indians and Chinese have historically made do with a frugal 100 gram or less. However, increasing affluence in these countries is now expected to drive a growing appetite for the food of the gods.

Large global agri-trading companies such as Cargill and Olam International, taking note of this trend, have in fact been setting up new cocoa grinding facilities in Asia to cater to the surging demand from chocolate manufacturers situated in these regions.

Amid already tight demand-supply dynamics, two additional sentimental factors have fanned global cocoa prices in 2014. With over 70 per cent of world cocoa production originating from Africa, the Ebola outbreak in the continent has periodically spooked markets. After starting the year at sedate levels of $2,820/tonne, in September 2014, global cocoa prices surged to over $3,370/tonne, a three-year high, on fears that the Ebola epidemic would severely curtail cocoa supplies from the two key producing nations of Ghana and Ivory Coast. Fears of El Nino anomalies making a late appearance and reducing yields have also stoked periodic price spikes.

According to a November 2014 report from the International Cocoa Organisation, cocoa arrivals in Ivory Coast from the start of the season (October 1) until December 7, were 13 per cent lower than previous year’s levels.

Cocoa offered for sale at Ghana was reported to be about 19 per cent lower in the first three weeks of the season. But with shipments since improving, global cocoa prices moderated to $2,970 levels by end December. While the supply deficits in the global cocoa market don’t appear likely to go away anytime soon, the market is presently in the grip of frenetic unwinding. The Ebola and El Nino fears in the last quarter of 2014 had prompted large global grinders and chocolate producers to raise their emergency stocks of cocoa beans in August/September. Now, with much of their demand front-ended and with speculators exiting the commodity, demand for cocoa has moderated in recent weeks, helping cool global prices. Relentless price increases on cocoa over the last three years have also forced chocolate majors such as Hersheys and Mars to announce a 7-8 per cent increase in product prices in October 2014, the first such increase since 2011.

There has no doubt been an irrational element to the runaway surge in cocoa prices in recent months. In fact, the ICCO has been at pains to cool irrational fears about the world running out of chocolate.

So, what’s ahead for the much sought-after bean in 2015? Well, while the production outlook will certainly change through the year, demand appears likely to remain firm. With the US economy on the mend and India and China expected to grow at 6 and 7 per cent, respectively, chocolate demand this year may be on a firmer wicket than last year. And despite a record crop in Africa, world stocks of cocoa remain not very comfortable.

According to the quarterly forecast published by the ICCO in August 2014, the cocoa year 2013-14 saw the stocks-to-grindings ratio at 38.9 per cent, registering a sharp fall from 46 per cent two years ago. The ratio, one of the lowest in the last 10 years, is an indicator that the world still isn’t producing quite enough cocoa to comfortably satisfy burgeoning demand, a bullish signal for prices.

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