Cocoa- 2015’s Best
Commodity, This Year’s Nightmare
Last year’s best-performing commodity is poised to
become the market’s worst nightmare.
After the longest rally in London cocoa futures since at
least 1989, farmers from Ivory Coast to Peru are preparing to revive supplies
in the 2016-17 season that starts in October, creating a surplus that Rabobank International says will be the largest in six
years. With demand slowing, the bank is most bearish about prices for the chocolate
ingredient this year among the dozen agricultural commodities it tracks.
Prices surged 60 percent during a four-year rally through
2015, forcing candy makers from Hershey Co. to Lindt
& Spruengli AG to charge more for their products.
Last year, El Nino weather patterns left dry conditions that hurt cocoa crops,
including in West Africa, which produces about 70 percent of the world’s beans.
London futures in December reached 2,332 pounds ($3,423) a metric ton, the most
since 2011, when a civil war disrupted exports from Ivory Coast, the top
supplier.
Cocoa was an anomaly last year, rising 14 percent in London,
when almost every other major commodity tumbled. Cocoa futures in London may
slide to 1,800 pounds by the fourth quarter, down 17 percent from Tuesday’s
close at 2,163 pounds.
Here
are five reasons for the bearish outlook:
The
government in Ivory Coast, which accounts for almost 40 percent of global
production, raised prices paid to farmers for a third consecutive year.
With
the cost rising for chocolate makers, many have tapped into inventories,
cutting demand for new supplies. Global grindings by processors, an indication
of consumption, will probably be unchanged or rise as little as 0.5 percent in
the 2015-16 season, according to a November estimate by Cargill Inc., the
world’s second-biggest processor.
Dry
conditions from El Nino probably will be replaced by a more favorable
La Nina pattern that will bring more moisture to cocoa crops, according to MDA
Weather Services. Three of five strong El Ninos since
the 1950s were followed by La Nina,
While
farmers in Ivory Coast and Ghana continue to dominate supply, output is growing
in Latin America. Countries in the region have been planting high-yielding
trees, according to the London-based International Cocoa Organization.
Production in Ecuador rose 6.8 percent in 2014-15, and expansion is occurring
in Colombia and Peru, the industry group said.
After
a production deficit of about 150,000 tons in the 2015-16 season that started
in October, the world will soon have more supply than it needs. Output will
exceed demand by 93,000 tons in the 2016-17 season, according to Rabobank. That would be the biggest glut since 2010-11.