Global chocolate binge has Olam predicting smaller cocoa surplus

  • Excess supplies seen falling from record to about 50,000 tonnes
  • Demand is growing in countries, including Indonesia and India

The world just can’t get enough chocolate.

With “tremendous” demand in emerging markets looking set to continue this season, the world’s third-largest cocoa processor is projecting a sharply smaller global surplus. Excess cocoa supplies that reached a record last season will probably drop to about 50,000 metric tonnes, said Gerry Manley, head of cocoa at Olam International Ltd.

Demand has picked up in Asia particularly, where countries including the Philippines, Indonesia, India and China are consuming more cocoa powder used in products like cookies and ice-cream, Manley said. And while West African growers may reap a second year of bumper crops, top producer Ivory Coast is unlikely to repeat last season’s record harvest.

“We are very positive on demand,” Manley said in an interview at the company’s London offices Thursday. “We are seeing good demand for cocoa powder across the world, but mainly emerging markets are in a leading position there.”

Benchmark cocoa futures traded in London tumbled 23 percent last year, the biggest decline since 2011 as output climbed to a record in Ivory Coast, while Ghana – the No. 2 grower – also reaped a big crop. The large African harvests helped push the global surplus to 371,000 tonnes, according to estimates from the Abidjan-based International Cocoa Organisation.

This season, global cocoa processing will probably rise by more than 3 percent, Manley said – adding that the forecast is conservative. Processing exceeded 5 percent growth in 2016-17. About 8,000 new products were launched in the confectionery market last year, Manley said.

Lower costs are boosting demand, with the global chocolate confectionery market expanding 2.3 percent in the three months to June and 2.2 percent the following quarter, the world’s top cocoa processor Barry Callebaut AG said earlier this month – citing data from analytics firm Nielsen. The rebound came after at least six consecutive quarters of contractions.

Underestimating Growth

Changing consumer habits means some traders may be underestimating growth. Trends including online shopping, as well as the rise of artisan shops and bakeries, are often missed by traditional data sources, Manley said.

Global cocoa powder demand is forecast to grow at 5 percent, and Olam is looking to capitalise on that. The Singapore-based company is investing to increase its capacity to mill cocoa-cake into powder in Asia, and is also planning a new milling facility just outside Chicago, Manley said. The factory should be commissioned later this month.

Demand for cocoa butter and cocoa liquor, used to make chocolate bars, is also growing and the market is tight despite last season’s record surplus, Manley said. That has helped boost cocoa-processing margins, with the so-called combined ratio — the price of cocoa products relative to beans — reaching the highest in more than a decade this year, according to KnowledgeCharts.

“There’s a lot of cocoa available today that’s not of the quality which we can put through our processing factories, nor can chocolate industries use it,” Manley said. “What we have seen – and it follows on from the El Nino year, is a destruction in quality and a reduction in fat content of beans – is an increase in free-fatty-acid levels, which have served to deteriorate much of the cocoa that’s in the surplus figures today.”

“Extraordinarily” good weather will probably ensure a large crop of 1.9 million to 1.95 million tonnes in Ivory Coast this season – down from over 2.1 million tonnes last season, Manley said. Ghana production is forecast at little change with 800,000 tonnes, while output will decline in Ecuador, Peru – and the Dominican Republic which was hit by hurricanes earlier this year.

There has been very little smuggling between Ivory Coast and Ghana, partly due to better border controls, Manley said. Olam doesn’t currently see a need for concern this year about the Harmattan – the dry desert wind that usually blows from December and can damage cocoa pods.

“We’ve had extremely good weather, otherwise this could have equally been a deficit year,” Manley said. “We do believe low prices will curtail production, and we do believe there’s only so much further that Ivory Coast can grow.”

While a second year of surpluses will probably keep cocoa prices range-bound, macro events could force speculators to cover their short positions. Speculators have been betting on falling cocoa prices in London for more than a year, data from the ICE Futures Europe exchange show.

“Since the beginning of 2017, we’ve seen a much sharper correlation between the gross short in cocoa and the gross short in the wider agricultural complex, especially softs,” Charles Leslie, at trader at Olam in London said in the same interview. “There’s much greater macro influence on cocoa, which is probably the major risk to the upside.”

Olam became the world’s third-largest cocoa processor after acquiring a unit of Archer-Daniels-Midland Co. in 2015. The company has been consolidating operations and is in the process of moving people from an office in Switzerland to the Netherlands, where one of the factories is located.

“We are in a stronger position today, because one of the weaknesses we had is that we’ve always been very good only on supply,” Manley said. “Today, we have a much better understanding of demand.”

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