Chocolate makers to benefit from cheaper cocoa prices
Cocoa is expected to go back into a supply surplus this year. The surplus will be highest in six years and will weigh on prices. Confectioners, who only last year were reducing the chocolate content of their bars, may be less thrifty this year. Chocolate makers to benefit from cheaper cocoa prices
Favourable weather has promoted a good cocoa crop this year in Africa. 70% of global cocoa comes from Africa. The main crop, which contributes to about 80% of the total annual harvest in Africa is be complete in March. The International Cocoa Organization (ICCO) yesterday released its supply and demand forecast for 2016/17, showing a return to a production surplus. Seasonal ‘Harmattan’ winds that threaten to damage the crop failed to materialise and its absence has reversed the supply deficit that the market had initially assumed. Cocoa prices have fallen by 40% and speculative positioning has fallen to an all-time low.
The ICCO forecasts that supply will increase by 14.8% to an all-time high of 4.6 million tonnes in 2016/17. Meanwhile demand will only rise 2.9% to 4.2 million tonnes.
Near-term pressures remain on cocoa prices. While port deliveries of cocoa at Ivory Coast have not risen substantially yet, that is due to a disruption with exporters. A number of local exporters who bought cocoa – expecting its price to rise – have defaulted on contracts. That cocoa is piled in warehouses, waiting to be re-auctioned. Once that cocoa is sold the elevated output is likely to enter global supply.
Following the dramatic 40% decline in cocoa prices since August 2016, we believe that demand could make a stronger comeback this year than the ICCO anticipates. In 2016, a number of confectioners reduced the cocoa content of their chocolates in an effort to reduce their costs amid high cocoa prices. Now that cocoa prices have declined, we could see a reversal of that strategy. Consumers concerned that that their Easter eggs will be light on chocolate need not worry with prices this low.
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Nitesh Shah, Research Analyst at ETF Securities
Niteshis a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).
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Strong inflows in cocoa of US$6.4m last week suggest tactical buying as price fell to a five-year low. The 6.3% price decline last week brought cocoa price to a five-year low at US$2338/ton. This price drop reflects a correction after a larger-than-expected production while the threat of the Harmattan (a dry and dusty wind) – initially expected to disrupt 50% of global production – did not materialise. We believe the current multi-year low in cocoa’s price is perceived as a buying signal by contrarian investors.
European corporate bonds ETFs saw US$4.3m outflows. We believe the ECB’s decision to reduce the amount of monthly bonds purchase by EUR20bn after April coupled with the highly uncertain outcomes from the upcoming presidential elections have weighed on investor interest in European corporate bonds. The French far-right Presidential candidate, Le Pen, who is currently in second place according to recent polls, has promised the return of the French franc, threatening a redenomination of EUR1.7bn of French debt into francs if she were elected with the potential to default.
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