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Covid shadow over cocoa to last until at least early 2021

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Coronavirus will cause “some uncertainty” in the cocoa market until at least early 2021, Olam International said, although highlighting that powder demand had remained “strong” despite the pandemic.

 

For cocoa processors, “the next six months, or next six-to-12 months, there will be some uncertainty because of Covid that we’ll all have to contend with,” said Shekhar Anantharaman, the chief executive of Olam’s food ingredients division.

 

“There is a little bit of uncertainty about chocolate demand certainly going into the second half,” he said, underlining “some uncertainty about Q3 and Q4”.

 

This after an April-to-June quarter when the group, which has cocoa bean crushing capacity of 700,000 tonnes, said that there had been “certainly, contraction in demand for confectionery” spurred by the pandemic.

 

Powder vs butter

Indeed, cocoa, with almonds and hazelnuts, represented for the food ingredients division “the three businesses that have got probably impacted in the first half and are looking at some kind of a more uncertain situation in the second half”.

 

Olam reported that its almonds, cocoa and hazelnuts businesses had been “adversely impacted” in the first half of 2020 “on account of adverse prices and margin pressures resulting from Covid-19”.

 

However, Mr Anantharaman highlighted too that the overall Covid-19 dent to cocoa demand had been focused on chocolate confectionery, made largely from cocoa butter, rather than on cocoa powder, used to make the likes of drinks and biscuits.

 

“There is very strong demand on the powder side.

 

“But there is contraction in demand on the confectionery side and from the chocolate companies. And we’ll have to see how that pans out.”

 

Almonds vs staples

The comments came as Olam unveiled first-half earnings up 44% to Sing$332.7m, boosted by asset disposals, on revenues up 7.1% at Sing$17.08bn.

 

Excluding one-off gains - which amounted to Sing$130.6m, largely on the sales of a stake in Arise P&L to AP Moller Capital, and of Olam’s 50% holding in Indonesian sugar refiner Far East Agri –earnings fell by 18.5% to Sing$202.1m.

 

Operating profits in the food and ingredients division fell by 40% to Sing$263.1m, reflecting margin pressures in the likes of cocoa processing, and in almonds, where Olam flagged a fall in “prices between the first half of 2019 and the first half of 2020 on account of the Covid-19 impact, as well as higher water prices for the 2020 crop in Australia”.

 

However, the Olam global agri division, which covers markets such as grains, animal feed and edible oils, operating profits gained 55% to Sing$228.9m, helped by food stockpiling, notably in Africa, spurred by the pandemic.

 

“The Covid-19 outbreak in the region had led to significant pantry restocking leading to greater demand for these food staples.”

 

Coffee recovery

 

Sunny Verghese, the Olam founder and group chief executive, said that "we saw a big uptick in demand for food staples in grocery and retail demand because of the pantry restocking effect at both the household level and the retail level".

 

This contrasted with markets for products, such as edible oils and coffee - more reliant on out-of-home and foodservice consumption “that was clearly impacted during the first half”.

However, Mr Verghese added that "we are beginning to see in coffee, which has also got a significant out-of-home consumption component that demand is beginning to recover.

 

For "categories like coffee, like edible oil, where there has been a significant out-of-home consumption, the worst demand contraction which we saw in the months of March, April and May. In June, July, we are seeing a significant pick-up".

 

Olam International shares added 6.1% to Sing$1.40 in Singapore.

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