Cocoa Butter Seen Falling Through Christmas as World Glut Grows

Cocoa butter, used to make chocolate, will trade 12 percent to 15 percent below an August estimate as pre-Christmas demand is too low to ease a world glut caused by increased grindings, a Bloomberg survey shows.

The cocoa butter price in Europe will be 0.95 to 1.1 times the value of the beans traded in London from now until the end of the year, according to the median in a Bloomberg survey of eight traders, brokers and analysts. That compares with a ratio of 1.08 to 1.3 expected in an August Bloomberg survey. The ratio is considered an indication of chocolate demand.

“The current stocks of cocoa butter are much higher than the world demand needs it to be,” said Javier Almela, chief purchasing officer at holding company Natra SA in Valencia, Spain, which buys almost 40,000 metric tons of cocoa a year. “Demand for butter ahead of Christmas didn’t pick up and I’d be surprised if it did now, as most of the chocolate that will hit the stores for the festive season needs to be in production already.”

Cocoa butter was 1,915 euros (1,654 pounds) a ton yesterday, or a ratio of 1.01, according to data on the Hamburg Cocoa & Commodity Office GmbH website. Cocoa for December delivery was 1,629 pounds ($2,607) a ton on NYSE Liffe in London yesterday.

European cocoa usage rose 14 percent in the third quarter to the highest since at least 1999, according to data from the European Cocoa Association. In North America, bean processing gained 3.4 percent over the same period, according to the National Confectioners Association.

Rising global grindings are adding to a glut of cocoa butter, which accounts for as much as 20 percent of a chocolate bar, at a time demand for chocolate in Europe and in the U.S. is stagnant, according to Shawn Hackett, president of Boyton Beach, Florida-based Hackett Financial Advisors Inc.

Inventories

Cocoa butter inventories may be as much as 150,000 metric tons, or 15 percent of global butter output, according to Steven Haws, founder of Commodities Risk Analysis LC, a cocoa research company based in New York.

“There only are estimates from incomplete information and casual assessments from experienced market participants,” Haws said by e-mail on Oct. 26. “Those estimates and assessments that I know generally place worldwide butter stocks at 125,000 to 150,000 metric tons. I think that the amount is reasonable.”

When cocoa beans are ground, 80 percent is transformed into cocoa liquor, which is then processed into cocoa powder and cocoa butter, Barry Callebaut AG (BARN), the world’s largest maker of bulk chocolate, said in a presentation on its website. About 46 percent of the liquor becomes butter and the rest is made into powder, the company said.

An increase in cocoa butter stockpiles may pressure bean prices, as the futures market is used as a hedging instrument for cocoa butter, according to Rabobank International.

Hedging

“High butter stocks suggest that there has been selling of the futures to hedge the price,” said Keith Flury, an analyst at the bank in London.

Grinding cocoa is still attractive even with butter ratios falling, as demand for powder continues to be strong, Hackett said. The average cocoa butter ratio in the Netherlands was 1.4 last year and 1.83 in 2009, data on Bloomberg show. Powder is used in chocolate-based products such as ice cream and cereal.

Processors’ profitability is measured by the combined cocoa ratio, which is the price of powder plus the price of butter divided by the price of beans. If the ratio is above 3.2, grinders are making a profit, according to Hackett.

“Current levels of the combined ratio remain very attractive near 3.6,” he wrote in a report e-mailed Oct. 30. “So long as demand for cocoa powder remains strong, grinders will continue to buy more beans.”

Demand for cocoa powder has been driven by developing countries, especially in Asia, said Sholom Sanik, an analyst at Toronto-based Friedberg Mercantile Group Ltd.

Developing Countries

“Whatever significant growth there is in chocolate consumption is to be found in developing countries, which generally use a much higher ratio of powder to butter in manufacturing chocolate,” he said in a report on Sept. 6.

Cocoa butter use fell after the global economic recession in 2008, Marex Spectron Group Ltd. said in a report on July 6. Chocolate sales in Western Europe fell 6.6 percent to about $35.7 billion in 2009, according to data from consumer research company Euromonitor.

Consumption of powder-based products is usually less sensitive to cocoa prices as they contain relatively low amounts of cocoa, according to the International Cocoa Organization. Powder usually accounts for 3 to 10 percent of the weight of a product, CRA’s Haws said.

To contact the reporter on this story: Isis Almeida in London at ialmeida3@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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