Cocoa Usage Seen Falling as Grinders Erode World Butter Glut

Global cocoa usage may drop for the first time in three years as grinders use cocoa butter stockpiles instead of processing the beans to meet demand in the $108 billion chocolate market.

World bean grindings this season will probably drop for the first time since 2008-09, according to Jonathan Parkman, co-head of agriculture at broker Marex Spectron Group in London. Declines in European and U.S. cocoa grindings in the second quarter probably turned the market into a surplus of more than 100,000 metric tons from a small shortage, Parkman said.

Chocolate demand is averting a slowdown unlike the 2009 global recession because of low cocoa butter prices. Sales volume will rise 1.2 percent this year, according to Euromonitor International Ltd., a consumer research company in London. When cocoa beans are ground, 80 percent are transformed into liquor, which is then processed into powder and butter. Cocoa butter can be sold in solid form in boxes or as liquid.

“Some European grinders, who can, have been melting liquor and butter to supply some of their contracts instead of grinding beans,” said Peter G. Johnson, chief executive officer at Morristown, New Jersey-based Transmar Commodity Group Ltd., a cocoa processing company with factories in Europe, Ecuador and the U.S. “The cost of purchasing boxed butter and liquor in many cases was cheaper than producing from beans.”

El Nino

Cocoa prices in London have climbed 12 percent this year on speculation El Nino, a warming of the Pacific Ocean, will curb production. Global chocolate sales are valued at $108 billion this year, Euromonitor estimates. Cocoa for December delivery was unchanged at 1,544 pounds ($2,397) a ton by 12:34 p.m. on NYSE Liffe in London. The price reached 1,564 pounds a ton earlier today, the highest since July 11.

Cocoa processing in Europe fell 18 percent in the second quarter to a three-year low and declined 9.8 percent in North America. In Malaysia, Indonesia and Singapore, where consumption of cocoa powder had been rising, bean processing advanced 5.7 percent, the Cocoa Association of Asia said.

Euromar Commodities GmbH, owned by Transmar, slowed processing at its factory in Fehrbellin, Germany, Johnson said. The plant has an annual capacity of 100,000 tons, according to Transmar’s website. Delfi Cocoa (Europe) GmbH, a division of Singapore-based Petra Foods Ltd., started to renovate its plant in Hamburg on July 1, instead of next year, which has resulted in slower bean processing, said Karel Menu, managing director of the company, in Zaandam, the Netherlands. He declined to disclose annual grinding capacity.

Butter Inventories

Cocoa butter inventories came to 150,000 tons, or 15 percent of global production, Steven Haws, founder of cocoa researcher Commodities Risk Analysis LC, said in November. Factories have bought back cocoa butter to stop grinding after powder prices fell, he said last week.

Powder prices, which reached a high of 4,100 euros ($4,968) a ton last year, have dropped to about 3,000 euros a ton, according to Haws. Cocoa butter, which trades as a ratio to the price on the NYSE Liffe exchange in London, is about 1.2 times the exchange price, up from 1 last year, he said.

“In the last six months, butter buyers were happy to purchase as far forward as they could because they considered the price to be cheap, while powder buyers were happy to run down their cover and wait for lower prices,” Haws said.

Global chocolate sales are forecast to climb to 7.1 million tons this year, says Euromonitor. Sales volume will advance 0.6 percent in Western Europe and fall 4.8 percent in the U.S., the researcher estimates.

Making Chocolate

“At the moment making chocolate is really cheap because of low butter ratios, bean and liquor prices,” Marex Spectron’s Parkman said. “Chocolate makers’ margins have improved dramatically.”

Cocoa beans are turned into butter, needed to make chocolate, and powder, used in ice-cream, cookies and soft drinks. Cocoa butter accounts for about 20 percent of the weight of a chocolate bar.

European grinders may be looking ahead and preparing for a potential drop in demand if economies slow even more, according to Kona Haque, an analyst at Macquarie Group Ltd. in London. Processing retreated 6.5 percent in 2008-09, the biggest decline since 1960, according to the International Cocoa Organization in London. In Europe, grindings fell 5.7 percent in 2009.

“I wouldn’t be surprised if we ended the year worse than in 2009,” said Javier Almela, chief purchasing officer at Natra SA in Valencia, Spain, which buys almost 40,000 tons of cocoa a year, commenting on Europe. “The third-quarter figures are unlikely to be positive.”

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