Cocoa proved one of the rare gainers in the commodities complex last year, rising by 10.3% in New York – a fourth successive year of gains.
London cocoa futures, denominated in sterling, gained 14.2%, gaining an extra fillip from an easing in the pound relative to the dollar.
The strength reflected production hiccups, blamed by many observers on El Nino, in Indonesia as well as the main West African cocoa-growing heartland.
While European and US cocoa grinding data were somewhat soft, appearing to indicate that high prices were curtailing consumption, the growing proportion of bean processing undertaken in origin countries such as Ivory Coast means that these statistics are not as influential as they once were.
Nonetheless, there are ideas that consumption is being curbed by high prices. Will this help cocoa fall in 2016? Or can futures sweeten for a fifth successive year?
“In the coming months, cocoa prices will be determined both by further shortages, causing a widening supply/demand mismatch, and the weather conditions.
“The latter factor is particularly important now that we are in the middle of the main production season. The estimated shortage… is expected to grow further in the current 2015-16 season.
“Commercial market parties also foresee a bigger shortfall this season. El Niсo, may well severely disrupt production in West Africa, while demand is continuing to rise.
“The result is a growing shortage, which we expect to keep prices at their current relatively high level in the coming period.”
“Historically, cocoa stocks-to-grindings and prices display a tight inverse correlation. Higher stocks-to-grindings ratios indicate a relatively loose fundamental environment, while low stocks-to-grindings ratios indicate tighter physical balances.
“The current cocoa environment – despite negative demand growth in 2015 and tepid demand growth forecast for 2016 – remains relatively tight.
“This should keep markets supported at elevated levels, generally supported north of $3,000 a tonne on ICE.
“Citi expects cocoa to trade in a historically high trading band. But market cheer is likely to be capped as high prices are curbing demand growth and confectionary sales and farmers will be incentivized to maximize output in 2016-17.
“A weaker outlook for sterling should also curb ICE contract markets.”
“A considerable deficit seems likely this season.
“It is after all not yet certain whether Ghana’s production will resume strong growth following last year’s slump. It was unusually dry there from July to September, and while the situation has meanwhile improved a little… Ghana had 50% less rain than usual from August to October. This was the lowest rainfall since 1999.
“It is far too dry in Indonesia as well, this again being attributed to El Niсo. Consequently, a smaller harvest than last year is expected. In Ecuador, too, El Niсo could hit the harvest, although in this case because of excessive rain.
“Another deficit on the cocoa market thus seems likely, but it has no doubt already largely been factored into high prices.
“If, however, deliveries in the Ivory Coast really fall behind last year’s,= news from Ghana proves disappointing and severe dry Harmattan winds additionally dampen harvest prospects, prices could be driven even higher.
“Demand will admittedly continue to respond, but not to the extent that prices will fall drastically. Demand has already been checked in recent quarters by rising prices.”
“Cocoa prices slipped by 3.2% in December. This capped total gains for the year at 10%, the outstanding soft commodity in 2015.
“Despite the end of the rally, prices remain at the highest level in nearly five years.
“This reflects the recovery in demand from grinders – notably in Asia, whose growth is offsetting North America’s slump – and the expectation of flat or falling production in 2015-16, in response to the impact of El Niсo on West Africa’s crop.
“With signs that deliveries are slowing sharply in Cфte d’Ivoire, and evidence of the impact of El Niсo across Africa, price strength is likely to continue, although given that prices are well above their five-year average of $2,800 a tonne, there is room for further price correction should West African supplies hold up.”
J Ganes Consulting
“The cocoa market has been able to avoid the bear market blues that other commodities have suffered from.
“What is more astounding is that the widespread belief that the 2014-15 season was in deficit was shown to be wrong and instead the supply and demand balance ended last season in surplus.
“In the latest quarterly view, the International Cocoa Organization revised the world cocoa production estimate upwards by 43,000 tonnes and world grind down 8,000 tonnes from their prior quarterly review and this was sufficient to tip the scale from a 15,000 tonnes stock reduction to a 36,000 tonnes gain.
“Theoretically, this should provide added cushion to the market for 2015-16 reducing the extent of a possible shortfall. Yet… the market recognises that this data could be misleading and that a strong Harmattan could spell trouble.
“These dry winds from the Sahara desert have already blanketed Ghana and Ivory Coast and may damage cocoa crops in the world’s largest producers.
“The cocoa market is particularly vulnerable or on edge because so much of the world’s production is concentrated in one region. Indonesia is the largest producer outside of West Africa and has seen a series of production setbacks.”
“Strong Harmattan winds and reduced fertilizer and pesticide application earlier this year very likely had a negative impact on main-crop production, while El Niсo conditions over the coming winter are keeping uncertainty extremely high for the mid-crop, harvested from May 2016.
“Yet in line with the global growth slowdown, grindings remained weak across the board.
“Price outlook: El Niсo conditions are likely to keep price action volatile for a few months more.
“However, in the absence of unfavourable weather, demand recovery is unlikely to be strong enough to keep the market in substantial deficit.
“Beyond the current harvest year, we forecast continued dollar strength will lead to downward pressure on costs and prices in dollar terms).
“The outlook remains very much dependent on the weather outcome over the coming months.”
“Dry weather in West Africa and Indonesia will be the key price driver for cocoa in 2016.
“Demand will remain rather obscure, as the reported grinding figures in the US and Europe no longer reflect the underlying demand, due to the increased processing capacity in West Africa.
“After a deficit of 85,000 tonnes in 2014-15, we expect to see another deficit of 150,000 tonnes in 2015-16.
“The resulting stock drawdown will mean a low stocks-to-use ratio not seen since the mid-1980s, which should keep prices relatively high.
“However, we believe prices may head lower… as internal prices in Cote d’Ivoire saw a sharp increase. This increase will incentivise a good 2015-16 harvest.”