Cocoa grinder Euromar Commodities GmbH is slowing processing at its German factory as it can’t find buyers for all its powder even as buoyant demand pushed prices for cocoa butter to the highest in almost 30 years.
The European unit of processor Transmar Group already reduced output at its plant in Fehrbellin, Germany and may halt production for three to four weeks in the summer, according to Peter G. Johnson, president of Morristown, New Jersey-based Transmar. Prices for cocoa powder, used in ice cream, cookies and drinks, tumbled to a five-year low in Europe in June as the processing industry faces excess capacity after new factories were built mainly in Asia and Africa.
While demand for cocoa butter, another product of beans that accounts for as much as 20 percent of the weight of a chocolate bar, remains strong even amid historically high prices, the new capacity is “adding fuel to the fire” for powder stockpiles and more factories will have to slow processing because they can’t afford to build up inventories, according to Johnson.
“Processing is slowing quite substantially now,” Johnson said in a phone interview on June 26. Chocolate makers used lower powder prices as an opportunity to cover themselves for as long as two years, making it “extremely hard” to sell powder now, he said.
Cocoa and chocolate companies have expanded processing capacity in Asia Pacific, the top consuming region with a quarter of global demand, according to data from consumer researcher Euromonitor International. More than 50 percent of volume growth in cocoa ingredients in the last five years came from this region alone, according to Lauren Bandy, a food analyst at Euromonitor.
Barry Callebaut AG (BARN), the world’s biggest bean processor, said last year it opened a plant in Indonesia with an annual capacity of about 30,000 metric tons. Olam International Ltd. (OLAM) and Cargill Inc. are also building new plants in Indonesia, the third-biggest cocoa grower.
Indonesia, where chocolate demand is expected to double in three years because of an expanding middle class and increased incomes, currently grinds as much as 420,000 tons and will this year increase capacity to 700,000 tons, according to the Cocoa Association of Asia.
“There’s now plenty of capacity to produce all the butter that anybody wants and is willing to pay for, but too much powder,” Steven Haws, founder of Bethlehem, Pennsylvania-based market analyst Commodities Risk Analysis, said in a phone interview on June 23.
European natural powder prices dropped more than 30 percent since January to 1,182 euros ($1,618) a ton as of June 27, the lowest since 2009, data compiled by KnowledgeCharts, a unit of Commodities Risk Analysis, showed. The price of cocoa butter in Europe climbed to 6,321 euros a ton in the week ended June 27, according to KnowledgeCharts data, the highest since about 1985.
When cocoa beans are ground, about 80 percent is turned into cocoa liquor, which is then processed into powder and butter, according to Barry Callebaut.
Chocolate makers who had held off buying because of high butter prices have realized they’re not well covered, according to Haws. “Some manufacturers waited to buy and used up inventories instead,” he said. “Now they need to book their butter for Halloween and Christmas.”
Faced with high prices, manufacturers will try to use less butter, possibly by adding filling, fruit flavoring or nuts to chocolate bars, according to Transmar’s Johnson.
The so-called combined ratio, a measure of grinder profitability, dropped almost 5 percent this year to 3.1 times the futures price in June, according to KnowledgeCharts data. The ratio is the price of cocoa powder plus the price of cocoa butter divided by the price of cocoa beans.
Cocoa processing in Europe rose 0.4 percent in the first quarter, climbing to 340,735 tons, the European Cocoa Association said in April. Grindings in Asia gained 3.7 percent in the first quarter to 159,617 tons, according to the Cocoa Association of Asia. Second-quarter figures are due to be released on July 10.
“Processing margins have been under pressure over the last six months,” Jos de Loor, president of Cargill Cocoa & Chocolate, said at a cocoa conference in Amsterdam last month. “When margins start to come down, then in a gradual process people will shut down capacity.”
To contact the reporter on this story: Morgane Lapeyre in London at email@example.com