Near perfect weather
Intermittent rain and sunshine in the West African Cocoa Belt, spanning Cameroon to Côte d’Ivoire, suggests weather concerns are not clouding prospects for the 2017-18 cocoa harvest and hope for a weather premium on the imminent crop remains dim for now.
To a large extent, the new season in West Africa, which officially starts on October 1, 2017, is still very much in the shadow of the 2016-17 bumper crop ending September 30. So much so that the revised balance for this season’s cocoa crop by the International Cocoa Organization (ICCO)—from a 382,000 tonne surplus to a 371,000 tonne surplus—was barely noticed. The figures from the ICCO indicate still-rising world output, forecast 18.1% higher this season compared with last and far outstripping the increase in global grindings which only recorded a 3.7% uptick year-on-year. Worse still, end-season stocks for the current season weigh heavily on the trade—estimated to be a mammoth 26% higher year-on-year.
Asia’s chocolate finger
The cocoa industry in Africa will therefore be anxiously eyeing developments in Asia where there is now growing evidence of improving cocoa consumption. In Indonesia—Asia’s largest cocoa processor—cocoa imports are expected to triple from 60,000 tonnes last year to 180,000 tonnes this year on account of firm demand from local processors. This has prompted the Indonesian government to consider imposing a flat tax of 15% on cocoa bean exports (from the current progressive regime which ranges from 0% to 15% depending on international prices) especially as Indonesian output is forecast to drop by 7% for the second consecutive season in 2017-18.
Still, demand from Asia will be insufficient to pick up the slack in what remains a buyer’s market and on this investors seem to agree. As such, Hedge Funds increased their bearish bets on London cocoa on the InterContinental Exchange (ICE) in Europe in the week ending August 29. Weekly ICE data showed money managers boosted their short-only positions on the commodity to the highest on record (October 2011) and the futures curve is now more bearish compared with prices as recently as last week.
Franc Action: Protect your downside
The London December contract is currently trading at GBP1,490 per tonne while New York is pricing December cocoa at USD 1,919 per tonne. Producers may profit from downside protection at current levels as we enter a seasonal slump in the market as new season volumes compound high old season stock.