Cocoa Futures Tumble on Bumper Harvest in West Africa

Cocoa for March delivery fell 3.2% to about £1,772 pounds ($2,151) per metric ton

c1Cocoa for March delivery fell as much as 3.2% to about £1,772 pounds ($2,151) per metric ton on the ICE Futures Europe exchange in London on Monday, January 09th, 2017, after negotiations ended a two-day army mutiny that had paralyzed several cities in the world’s largest cocoa producing nation, Ivory Coast. In New York, cocoa futures for March delivery dropped 4% to $2,171 per ton on the same day, as reported by Bloomberg.

The unrest supported cocoa prices on Friday, January 06th, 2017, taking weekly gains to 5.1%, the biggest for a most-active contract since August 2016. Earlier during 2016, cocoa futures tumbled 23%, the most since 2011. Traders are expecting supplies to improve as bumper crops in West Africa help the market return to surplus. As a result, hedge funds are cutting their cocoa net-long position, or wagers on price gains, compared to 2015, when the investors had a net-short holding.

Market sees biggest surplus in six years

Earlier in December 2016, cocoa futures tumbled to three-year low on ballooning supply as hedge funds held the smallest net-bullish position since 2012. Over the past few months, cocoa prices have been receding as rains improved crops in West Africa, which grows more than two-thirds of the world’s cocoa each season. The output gains mean the market is shifting from a production deficit to the biggest surplus in six years.c2

Adding to the overhang, an increasing number of health-conscious people are eating less chocolate. In the US and Europe, the largest consuming regions, snackers are seeking healthier options like protein bars and yogurt. At the same time, confectioners have reduced the size of sweets and are using more fillers; the result of cost-cutting measures when cocoa prices surged in the four years through 2015. The Hershey Company (NYSE: HSY), the largest chocolate candy seller in the US controlling nearly a third of the market, reported plunging sales in 2015 for first time in more than a decade. To cash in on the growing trend of healthy snacking among sugar wary consumers who are shunning chocolates and candy, Hershey’s diversified into dried meat with the launch of Hershey beef jerky.

Price reversal to continue

The fall in cocoa prices are a reversal from record prices in 2015, when cocoa prices rose for four straight years, rising more than 50% over the period. At the same, prolonged drought in West Africa had hurt plants, creating a disruption in supply. However, in a sign that bodes well for chocolate lovers, cocoa prices are expected to remain subdued for the next few months, mainly due to a supply glut in the market. Analysts also say that there is unlikely to be enough demand to soak up the rising supplies because consumption is already very high and consumers are seeking snacks with less sugar. According to Euromonitor, global retail sales of chocolates in 2016 were down about 1.9% versus 2014.

In the week ended December 04th, 2016, cocoa-bean arrivals from Ivory Coast, the top producer, surged 49% from a year earlier. The nation is expected to produce almost 1.7 million metric tons of cocoa beans during the 2015/2016 crop year (October 2015 to September 2016).

c3Ivory Coast had sold forward 1.30 million tons of 2016/17 (cocoa growing year extends from October 2016 through September 2017) beans by November 25th, 2016, according to the Coffee and Cocoa Council marketing board, and as reported by Reuters. It supplies 33% of the cocoa produced in the world. The crop is grown in Ivory Coast mostly by smallholder farmers planting on 1-3 hectares. Reputed chocolate producers like Cadbury, Hershey’s and Nestle buy Ivorian cocoa futures and options through Euronext, whereby world prices are set.

The West African nation sells forward the bulk of its anticipated harvest via electronic auctions and uses the average sale price to set a minimum price for farmers. Patchy light rains mixed with hot weather and mild Harmattan winds in most of Ivory Coast’s main cocoa growing regions should boost next year’s crop, farmers said on December 27th, 2016, but demand from buyers has slackened due to low global prices.

West Africa collectively supplies two thirds of the world’s cocoa crop, with Ivory Coast leading production at 1.65 million tons, and nearby Ghana, Nigeria, Cameroon and Togo producing additional 1.55 million tons. The primary non-African competitor of Ivory Coast is Indonesia, which is the second largest producer of cocoa in the world.

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