Poor African Crops Send European Cocoa Grind to 5-Year High

  • Bean grinding rose 4.9% in Europe in second quarter, ECA says
  • Poor West African crops mean local factories couldn’t process

European cocoa processing climbed to a five-year high in the second quarter as poor-quality beans in West Africa, the world’s largest producing region, spurred grinders to tap stockpiles elsewhere.

Grindings jumped 4.9 percent in the three months through June to the highest for that quarter since 2011, the Brussels-based European Cocoa Association said in a report on its website Tuesday. The increase was bigger than the 3.2 percent expected in a Bloomberg survey of 11 traders, brokers, analysts and fund managers published last week.

Cocoa processors are shifting grindings to Europe as the poor quality of crops in West Africa mean they haven’t been able to boost activity locally. Dry weather damaged the mid-crop, the smaller of two annual harvests in Ivory Coast and Ghana, forcing factories to tap stockpiles in Europe at a time traders including Cargill Inc. and Olam International Ltd. forecast shortages.

"It appears that the impact of El Nino on this season’s cocoa crop in West Africa is finally showing in the wider cocoa industry," said Edward George, head of research at Lome, Togo-based lender Ecobank Transnational. "Ivory Coast’s crop is around 10 percent down on last year’s record, and bean rejections have been unusually high."

Expecting Upside

European processing came to 324,968 metric tons in the period, up from 309,677 tons a year earlier, ECA data showed. In Germany, bean grinding rose 2 percent to 90,510 tons, the Bonn-based Association of the German Confectionery Industry said on its website.

“We were expecting some upside because of the situation in West Africa,” Carlos Mera, an analyst at Rabobank International in London, said Tuesday.

Grindings were expected to increase due to lower processing in West Africa and better margins, which gained from higher cocoa-butter prices relative to bean futures, Max Goettler, a trader at Cocoanect BV, said last week. Higher prices for earlier-dated futures also made it expensive to store cocoa through the summer, according to the Rotterdam-based trader.

Cocoa futures traded in London jumped almost 10 percent this year partly as dry weather damaged beans in West Africa. Beans for July surged to a premium of 75 pounds ($99) a ton to the next futures contract, the highest since that spread started trading in 2014, ICE Futures Europe data showed. That market structure, known as backwardation, may signal tight supplies.

Smaller Beans

The dry weather earlier this year has led to smaller beans with less fat content during the mid-crop, Barry Maas, a customer risk manager at Cargill Cocoa & Chocolate Inc., said in a June report. Cocoa that doesn’t meet export requirements might be held back for sale into the next season, meaning the perceived shortage may increase over the summer months, he said.

Higher grindings don’t reflect rising demand. Global chocolate sales fell 2 percent in the nine months through May, with the market contracting 1.2 percent in Europe, the Middle East and Africa, 3.3 percent in the Americas and 2.1 percent in Asia, Barry Callebaut AG, the world’s top cocoa processor, said Thursday, citing figures from analytics group Nielsen.

Processing in producing countries has expanded in recent years as governments have given incentives for companies to build factories. The decline in West African processing due to a poor-quality crop raises questions over the viability of the sector in Ivory Coast and Ghana, which have struggled to produce competitively priced cocoa products, Ecobank’s George said.

Before it's here, it's on the Bloomberg Terminal.