Cocoa Market Braces for Largest Surplus in 6 Years

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Spend Matters welcomes this guest post form Avneet K Deol, market analyst at Mintec.

In the run up to Easter last year, a survey conducted by the National Retail Federation estimated that Americans spend around $2.4 billion on candy, and this year is looking to be no different, with 87% of parents preparing an Easter basket for their children. So in terms of impact for chocolate sales (mainly eggs), Easter is more important than both Halloween and Valentine’s day. Given the time of year and news that cocoa bean prices have plummeted in recent months, we decided to take look at the reasons for this.

Cocoa has dropped just over 30% on ICE futures U.S. from the start of the season in October to the lowest level in level in nine years, as global market shifts from a deficit in the previous season to the largest surplus in six years. The initial forecast for global production in the current 2016/17 season is up 15% year-over-year at 4.55 tons, driven mainly by an increase in the Ivory Coast, as well as Ghana, Indonesia and Ecuador.

Production in the Ivory Coast is expected to increase 20% y-o-y to 1.9 million tons, following a decline last season, when strong, dusty harmattan winds from the Sahara combined with drought conditions caused by El Nino damaged the crop. In contrast, harmattan winds were mild this season. While global cocoa grindings have increased for the first time in over two years, they will see a modest increase of 3% y-o-y at 4.23 million tons — still lower that the rate of production. The outlook for a supply surplus is likely to continue to weigh down on bean prices in the short term.

However, not everything is looking so rosy at origin, with a number of exporters facing some financial difficulties, primarily those who took a long-term view of the market and bought stock. They are now facing massive losses, and some have already defaulted on contracts. This has led to cocoa piling up in warehouses at the major ports and is affecting cocoa farmer’s profits. If low prices continue, supply disruptions could impact the global chocolate market.

We mentioned earlier that it was great news that cocoa bean prices had decreased from a consumer perspective. The not so good news is that manufacturers plan Easter some 12 months in advance. So assuming that there are no supply disruptions, we will probably not see any decrease in the price we pay for our chocolate Easter eggs until Easter 2018.

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