Global Cocoa Mountain Shrinks as Asia Hankers After Chocolate

(Bloomberg) -- Chocolate lovers in Asia are taking a big bite out of the global cocoa glut.

From India to China, where demand is growing faster than in major markets like Europe or the U.S., consumers are eating more chocolate. At the same time, big growers in West Africa are harvesting smaller crops. Top processors Cargill Inc. and Barry Callebaut AG expect those trends to erode a glut that made cocoa one of the worst-performing commodities the past year.

“The crop probably will not be as strong as last year, and you'll see growth in demand,” Harold Poelma, president of Cargill's cocoa and chocolate unit, said in an interview in Singapore. “These two things together make for a modest surplus, which is the expectation that we have now.”

Cocoa prices plunged 34 percent last year and are down again in 2017 after big harvests in Ivory Coast and Ghana overwhelmed demand. Production in the two countries -- which account for two thirds of global supply -- is now set to fall, as is the harvest in Indonesia, Asia's top producer. Citigroup Inc. forecasts the surplus will shrink to as little as 50,000 metric tons in 2017-18 from almost 500,000 tons a year earlier.

Since touching a nine-year low in April, cocoa on ICE Futures U.S. in New York is up 19 percent to $2,084 a ton on Thursday. While hedge funds have been betting all year that prices would keep dropping, they have reduced their net bearish holdings for three straight weeks to the lowest since early August.

To be sure, any rally may be limited because there is still too much cocoa left over from last year's harvests, though the glut is shrinking, Citigroup said in a Sept. 20 report. The bank sees prices at $2,005 this year and $2,150 in 2018.

Still Depressed

“World cocoa-bean prices are likely to remain depressed in 2018 amid forecasts of another year of oversupply and increased inventories due to favorable weather,” Bloomberg Intelligence analysts Diana Gomes and Duncan Fox wrote in an Oct. 3 report.

Top producer Ivory Coast harvested a record crop in the season that just ended, with purchases exceeding 2 million tons for the first time. Output may shrink to 1.88 million tons this year, according to the median estimate in a Bloomberg survey of traders, analysts, brokers and grinders. Ghana, the second-biggest grower, will delay the start of the new cocoa crop as it waits for the proceeds of a $1.3 billion syndicated loan to pay farmers.

Supply in Asia is also set to decline as government incentives mean Indonesian farmers favor other crops including corn, rice and palm oil. Production by Asia's biggest grower is expected to shrink by 8 percent this year and 10 percent in 2018, according to agri-tech startup PT Koltiva. As a result, the country will need to import a record volume of beans this year, Soetanto Abdoellah, the chairman of the Indonesian Cocoa Board, said in an interview in Singapore this week.

Sweet-Tooth

That'll just add to demand that's already accelerating in Asia as incomes grow and people develop a taste for chocolate. While consumption in Europe and the Americas has eased significantly, it's now also “recuperating,” said Ben De Schryver, Barry Callebaut's Asia-Pacific president.

“If the economy continues to grow as we foresee it, we also expect that cocoa and chocolate will grow particularly in Asia where you have people moving into middle class incomes and people getting more familiar with the product,” Cargill's Poelma said.

Asian demand will probably climb 3 percent to 4 percent annually in coming years, compared with long-term global growth of 2 percent, according to the trading company. India's annual growth in chocolate and cocoa consumption over the next five years may be close to 15 percent. While demand in China has been flat in the last few years, it may rebound to 3 percent to 4 percent in the future.

“We'll be coming off a big surplus, the crop will be a little bit lower,” De Schryver said in an interview this week while attending the International Cocoa Conference in Singapore. “This year it will be down, we don't know how much it will be down. It's too hard to predict at this point.”

To contact the reporter on this story: Anuradha Raghu in Kuala Lumpur at araghu3@bloomberg.net.

To contact the editors responsible for this story: Phoebe Sedgman at psedgman2@bloomberg.net, Alexander Kwiatkowski