Olam Raises Cocoa Shortage Forecast After Poor Africa Harvest

  • World’s third-largest processor sees deficit of 350,000 tons
  • Supply crunch to worsen through 2016, last into first quarter

Chocolate makers aren’t getting a break anytime soon.

A smaller-than-forecast cocoa harvest is expected to increase a global shortage, which is the worst in decades, according to Olam International Ltd., the world’s third-largest cocoa processor. Supplies will fall short of demand by 350,000 metric tons in the season ending Sept. 30, 14 percent more than a previous estimate, said Amit Suri, Olam’s chief operating officer of cocoa.

The strongest Sahara desert winds in three decades dried out the smaller of two annual crops in West Africa, which accounts for 70 percent of global output, at a time of falling production in Indonesia. Low-quality beans and falling supplies led factories in producing nations to scale back, leaving buyers scrambling for cocoa butter, a key chocolate ingredient.

"The light crop has just been a disaster in Ivory Coast and the Indonesian crop has been much smaller than we thought," Suri said Thursday in an interview at the European Cocoa Association’s Forum in Dubrovnik, Croatia. "We are seeing acute shortages in Asia, acute shortages in America, acute shortages in Africa."

Cocoa futures traded in London are little changed for 2016. In July, prices reached a six-year high, overtaking levels reached during the civil war in Ivory Coast, when a ban was imposed on shipments from the world’s largest producer. Since this year’s peak, futures have fallen 10 percent.

Cocoa Crunch

This season’s supply crunch will last through the rest of the year and spill over into the first quarter, he said. The shortage started to bite in the second half and the amount of inventory relative to processing fell below a 30 percent threshold, Suri said. That would be the lowest level in more than 30 years, according to data from the International Cocoa Organization in London.

The so-called stocks-to-grind ratio started the year at 38 percent and Europe is the only region with "comfortable" stockpiles, Suri said.

The slowdown in grindings from producers such as Ivory Coast and Indonesia increased the cost of cocoa butter relative to bean futures. The ratio climbed more than 20 percent in Europe this year, based on data from KnowledgeCharts, a unit of Commodities Risk Analysis.

Next Season

The development of next season’s crop, which usually starts in October in Ivory Coast, was late and bean deliveries won’t be good in October, Suri said. While Olam expects an average to slightly-above-average Ivorian harvest next season, the delayed development means the crop remain vulnerable.

In Ghana, the second-largest producer, the setting was probably similar to last year, which was not good, he said.

"We are not seeing any origin pick up in October or even in early November," Suri said. "Then we expect Ivory Coast to pick up, but the first thing that will happen to those beans is replenish the local industry’s requirement.”

“There will be some commercial shipments that will happen, but the local industry will need those beans very desperately," he added.

There is now a shortage of cocoa butter and not enough to meet demand for the fourth quarter, when consumption rises during Halloween and Christmas, according to Olam. Cocoa butter usually accounts for 20 percent of the weight of a chocolate bar.

"The first quarter, it will still be tight," Suri said. "The beans that will be coming through in November and December aren’t enough to produce the products we think the market needs."

The world needs “sizable increases” in production in 2016-17 for the market to be balanced, he said. Grindings are set to pick up due to higher profit margins and declining cocoa bean prices. Even if processing rises by only 1 percent, global production needs to rise 400,000 tons to make up for this season’s deficit, he said.

"You are not really going to catch up with that deficit until the latter part of next year," Suri said. "And for that, you are going to need not only good main crops, but above-normal mid-crops."

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