Record Chocolate Sales Boosting Cocoa Demand to Leave Shortages

Record chocolate sales are boosting cocoa demand and prices as bean supplies lag behind demand for a second year.

Output will be 129,000 metric tons smaller than demand in the 12 months starting Oct. 1, Euan Mann, director at the London-based Complete Commodity Solutions Ltd., said at the European Cocoa Association conference in Istanbul this week. That follows a shortage of 119,000 tons a year earlier. Chocolate sales will rise 6.2 percent to a record $117 billion next year, researcher Euromonitor International Ltd. estimates.

Demand for cocoa beans will jump 3 percent to 5 percent in 2013-14, Peter B. Johnson, chief executive officer of Fehrbellin, Germany-based cocoa processor Euromar Commodities GmbH, said at the conference. Futures rose to the highest in almost a year in London to 1,685 pounds ($2,674) a ton on Sept. 5, entering a bull market. The cost of cocoa butter relative to beans in Europe jumped to the highest since 2008 last month. Butter accounts for 20 percent of the weight of a chocolate bar.

“The reports that we’ve seen in the U.S. show that for the first time in quite a while, the consumer data looks positive,” Kip Walk, corporate director of cocoa and sustainability at Blommer Chocolate Co., North America’s biggest processor, said in an interview in Istanbul today. “I’d say that seeing the rapid increase in butter ratios over the past year or so would underscore the fact that demand for chocolate products would be on the increase.”

Cocoa Prices

Cocoa gained 17 percent in London and 16 percent in New York this year. The beans are the second-best performer in the Standard & Poor’s GSCI gauge of 24 raw materials, after oil. Prices climbed as demand improved in developed economies just as dry weather threatened to cut output in West Africa, the main growing region accounting for 70 percent of global supply.

Global sales volume of chocolate confectionery will gain 2 percent this year and the next after rising 1.4 percent in 2012, estimates Euromonitor International. Chocolate demand in China will expand 11 percent annually in the five years to 2018, 13 percent in Brazil, 22 percent in India and 8 percent in Eastern Europe, said Frank Day, vice president of commodity operations for The Hershey Co., maker of Hershey Kisses and Reese’s Peanut Butter Cups.

“I’m optimistic on demand,” Day said. “I think that will keep some firm legs underneath the cocoa market.”

The cost of cocoa butter relative to bean prices rose to 2.65 to 2.75 times the futures on NYSE Liffe at the end of last month, said three traders with direct knowledge of the sales. That was the highest since 2008, when the ratio was at 2.66 on Dec. 12 and 2.79 on Oct. 31, according to data on the website of KnowledgeCharts, a unit of researcher Commodities Risk Analysis in Bethlehem, Pennsylvania.

Butter Ratios

The surge in butter ratios “took people by surprise” as the consensus was that demand in emerging markets would mean a market driven by cocoa powder, another byproduct of bean processing used in ice cream and baking, said Pamela Thornton of Armajaro Asset Management LLP, a hedge fund in London. Consumers in emerging markets are starting to develop a taste for real chocolate, said Amine Berrada, general manager at Casablanca-based Compagnie Cherifienne de Chocolaterie.

Cocoa butter ratios climbed 32 percent in Europe this year while powder prices tumbled 43 percent to 1,478 euros ($1,963) a ton, according to KnowledgeCharts data. Powder buyers have been holding back their purchases waiting for prices to fall further, said Lukas Jasman, chief operating officer of the Tangerang, Indonesia-based grinder PT Bumitangerang Mesindotama, known as BT Cocoa.

“As long as they don’t sell the powder, there’s an incentive for pressers to bring the butter price to a level whereby most, if not the totality of the processing cost, is covered by butter sales,” said Damien Thouvenel, a cocoa trader at Paris-based Sucres et Denrees SA, known as Sucden. “In theory, that could mean butter ratios above 3.”

Combined Ratio

Higher costs for cocoa butter mean that processors’ profitability, or the so-called combined ratio, has improved and that will bring more capacity on stream and increase supplies, Mann of Commodity Solutions said.

Prices, currently at 1,678 pounds a ton in London, will need to rise to 1,800 pounds to 2,220 pounds a ton to ensure that supplies meet or exceed demand, creating a “sustainable cocoa market,” Mann of Commodity Solutions said. Cocoa is “too cheap” considering costs and labor required, said Amit Suri, chief operating officer of Olam International Ltd., who is based in London for the Singapore-based company.

“The Hershey company is very optimistic about demand growth around the world and in emerging markets,” Day said. “To meet this demand growth the origin countries will have to modernize cocoa and increase production. That will be good for the cocoa farmer.”

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