Spend Matters welcomes another guest post from Corrina Savage of Mintec.
The demand for chocolate remains on the increase despite the soaring cost of the key ingredient, the cocoa bean. The price of cocoa beans has been climbing since early 2013 and reached over $3,100 per metric ton at the end of June - a 37-percent increase since January 2013, and a three-year high. This price increase doesn’t seem to have curbed our desire for chocolate though!
Cocoa beans are traded as spots (or “cash” – i.e. trading goods that are immediately available) or on the two futures markets: London and New York. Cocoa beans bought in the EU are almost entirely West African and the Indonesian crop is mainly sold in the US. Cocoa is a very sensitive market because of highly speculative elements in the futures markets. Due to the different sources and customer bases, the two futures markets are often unrelated.
Cocoa butter and cocoa powder are traded priced as a ratio of the cocoa bean price. This mechanism allows the sharing of risk between the buyer and seller, as the actual price will vary in line with the variation in cocoa bean prices. These ratios usually remain stable while market factors affecting the cocoa market remain stable. These include supply and demand for cocoa beans as well as cocoa butter and cocoa powder, as “twin” products. Processors must sell the same amount of cocoa powder by-product as cocoa butter and the profitability of the operation depends on the prices of both products.
The higher bean prices have mainly been driven by an accelerated increase in demand for cocoa butter in 2013/14. Over the past few years, chocolate demand had been only modestly rising as the world’s economy was hit by recession; however, as the global economies started to recover so did chocolate demand. The form it came in was a fast tracked demand increase from the developing and emerging markets, as the middle class sector in these countries and their disposable incomes expanded rapidly.
Over 95 percent of cocoa butter production is used for making chocolate, so the higher the level of grindings the more demand there is for chocolate. Grindings for 2012/13 were up 3 percent year-over-year to 4.0m tons, but this rose to 4.2m tons in 2013/14, a further 3-percent year-over-year increase. Grindings are expected to continue to increase. Even though supply for this season is expected to keep up with demand with a surplus of 30,000 tons forecast, there is a reported deficit of 100,000 tons forecast for the 2014/15 crop. Early forecasts indicate an increase in global cocoa production of 1.5 percent in 2014/15 but this increase in supply is at a much slower rate than consumption.
Even though the 2014/15 production forecast is up, it can still be unpredictable. Some of the main cocoa producing countries are prone to political instability. Outbreaks of political unrest can detrimentally affect the production and transportation of cocoa. For this reason the up-and-coming elections in the Ivory Coast are a cause for concern for cocoa manufacturers.