Cocoa grind in major processing regions slows to weakest since 2016

Growth in cocoa grinding slowed significantly at the close of 2019, data on Friday showed, raising concerns over demand prospects, although worries over West African production underpinned futures prices.

Western European cocoa processors, the world’s largest, ground 355,201 tonnes of beans in the October-to-December period, a drop of 1.1% year on year, the European Cocoa Association said.

The decline left the region’s total grind for 2019 at 1.43m tonnes, down 0.2% year on year, its first annual decline since 2014.

For North America, the grind for the latest quarter, at 110,321 tonnes, dropped by 5.9% year on year, dragging the total volume processed for 2019 into a 2.0% decline, to 474,185 tonnes.

Asian slowdown

While some decline in Western markets was not entirely unexpected, given a trend among processors to switch their activities to cocoa producing regions, such as West Africa, or fast-growing markets, such as Asia, the Asian grind failed to offset the decline.

The cocoa grind in Asia in the October-to-December period, at 227,013 tonnes, was up 8.7% year, and “another record, reflecting the continuing demand for cocoa products in Asia”, the Cocoa Association of Asia said.

However, the figure represented a sharp slowdown on the 14.7% growth reported the previous quarter.

The combined European, North American and Asian data showed a grind, at 692,535 tonnes, up 1.1% year-on-year – representing the slowest rate of annual expansion since the January-to-March period of 2016.

‘Actually disappointing’

The data were “actually disappointing”, said Jonathan Parkman, joint head of agriculture at Marex Financial, adding that aggregate grind growth came in at about 1% even including data gleaned from Africa and South America too.

“That is about 1.5 points below where we had thought growth in the fourth quarter grind would be,” he said.

The data “raise concerns about demand over 2019-20, especially in the second half of the season”, which will end in September.

While Marex had expected year-on-year expansion in the global grind of “a bit above 2%” for the season, “now we will have to hope we have any growth at all”, Mr Parkman told Agrimoney.

‘Demand is not there’

The slowdown may have reflected factors such as a backwardated structure in futures, the September-to-November rally in prices, and uncertainties over the implications of the introduction of a “living income differential”, or LID, levy on beans by Cote d’Ivoire and Ghana.

The LID scheme is seeing the two countries, which are between them responsible for more than 60% of world cocoa production, add $400 to cocoa contracts from 2020-21 to raise cash to tackle farmer poverty.

Mr Parkman noted that emerging market grinders are “more price sensitive” than those in the West.

He flagged too that - with 2.5 tonnes of beans needed to produce, say, 1 tonnes of cocoa butter - the implications of the levy were concentrated as cocoa progresses through the processing chain.

However, ultimately, the data showed that “demand is not there”, he said.

Futures soar

Cocoa futures rose on Friday despite the disappointing demand data, with the New York March contract up 2.8% in late deals at $2,788 a tonne, earlier touching a 20-month high for a spot contract of $2,795 a tonne.

London March cocoa futures stood up 2.1% at £1,996 a tonne.

The gains reflected concerns over dryness which in West Africa, where the late main crop harvest was falling short of expectations, and where the Cote d’Ivoire midcrop harvest was not seen coming in “slightly below normal”, Mr Parkman said.

When investors had expected even cocoa production and consumption in 2019-20, “it only takes a small change in production, and the supply and demand balance can skew”.