Cocoa Butter Rally Won’t Stop a 15% Drop in EU’s Grind

A rally that drove cocoa butter to a 16-month high won’t prevent European bean processing from falling in the third quarter as grinders are unlikely to bring factories back on because of low prices for cocoa powder.

Cocoa butter, which accounts for as much as 20 percent of the weight of a chocolate bar, costs 1.46 times the price of beans on NYSE Liffe on Aug. 17, the highest since April 2011, according to Commodities Risk Analysis LC, a researcher in Bethlehem, Pennsylvania. Bean processing in Europe will drop 15 percent in the third quarter, according to the mean estimate in a Bloomberg survey of 10 traders, grinders, brokers and analysts. Companies slowed bean-grinding after prices for cocoa powder fell, eroding their profits.

Powder prices in Europe were at 3,073 euros ($3,859) a metric ton on Aug. 17, down 12 percent this year and from last year’s high of about 4,100 euros a ton, CRA data showed. Euromar Commodities GmbH slowed bean processing at its factory in Fehrbellin, Germany, this year. Delfi Cocoa (Europe) GmbH started to renovate its plant in Hamburg on July 1, resulting in slower grindings.

“In theory, grinders are close to break-even margins now, but the reality is that it’s easy to sell butter and very difficult to sell powder,” said Peter G. Johnson, chief executive officer of New Jersey-based Transmar Commodity Group Ltd., owner of Euromar and other factories. “Processing is still slow as factories don’t want to produce just to sell butter while in the process adding more powder stocks.”

Grinding Beans

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 AG, the world’s largest bulk chocolate maker. While butter is used to make chocolate, powder is predominant in cookies, ice cream and drinks.

A grinder’s profitability is determined by the price of cocoa powder plus the price of cocoa butter divided by the price of cocoa beans. That forms the so-called combined ratio. Demand for powder, which has been supported by sales to emerging markets, especially Asia, dropped as economies slowed. China will grow 8 percent this year, compared with 8.2 percent seen in April, the International Monetary Fund said on July 16. The country grew 9.2 percent in 2011.

“Butter ratios are rallying because processors have slowed down bean grindings and have been reducing butter inventories as a result of the weak combined ratio,” said Nick Donald, founder of Jersey, U.K.-based broker Donald Cocoa Jersey Ltd. “Powder prices remain weak, and even though origin processors are more or less back to a break-even margin now, it is unlikely that we will see a significant increase in grindings soon.”

Cocoa Processing

Cocoa processing in Europe fell 18 percent to 292,551 tons in the second quarter, according to the Brussels-based European Cocoa Association. In North America, grindings dropped 9.8 percent to 112,768 tons in the same period, data from the National Confectioners Association in Washington showed.

Cocoa butter fell to a low of about 1 times the exchange price last year as a glut of the product emerged, while powder rose, according to CRA data. Demand for butter fell after the global economic recession in 2008-09, according to broker Marex Spectron Group in London. Higher cocoa prices also prompted manufacturers to reduce bar sizes, said London-based consumer research company Euromonitor International Ltd.

“What we are seeing now is the reverse of the cycle that drove butter prices to historic lows,” Transmar’s Johnson said.

European Grind

Bean processing in Europe totaled 378,068 tons in the third quarter last year, a record for any three-month period since the ECA started publishing processing data in 1999. Grindings gained after the end of a cocoa bean export ban in Ivory Coast, the world’s largest producer.

“Given the high base, grindings should post another significant drop year-on-year,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt. “If grindings rise 2.5 percent versus the second quarter, they would still drop 20 percent year-on-year. This is not what I expect but just to illustrate how high the bar is.”

Cocoa for December delivery slid 0.6 percent to 1,574 pounds (2,494) a ton by 1:23 p.m. on NYSE Liffe in London.

(Commodities Risk Analysis corrects second date in second paragraph in story first published Aug. 24.)
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