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Cocoa demand to see change of driver

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Have cocoa butter prices enjoyed their last hurrah?

Values of cocoa butter, the fat credited with giving chocolate its melt-in-the-mouth qualities, soared in the key European market to some $8,500 a tonne in the summer, compared with values below $2,000 a tonne for cocoa powder, the other main bean processing product.

That unusually high, if not unprecedented, butter-to-powder ratio has since begun to correct, as price signals have worked through.

"There comes a point where the spread is sufficiently wide that manufacturers will make adjustments and reduce cocoa butter purchases and utilise more powder where possible," veteran soft commodities analyst Judith Ganes-Chase said in a report last week.

"The outright price of cocoa butter became unrealistically high to maintain strong demand," allowing prices to fall by the end of last month to about $6,500 a tonne, according to the International Cocoa Organization.

And this against a backdrop of recovering prices of powder, which is typically used for making the likes of chocolate biscuits and ice cream.

Wide gaps between butter and powder prices "are never maintained", Ms Ganes-Chase said.

"And despite some perhaps believing otherwise, there has been no paradigm shift that would change the economics and keep cocoa butter at lofty levels and cocoa powder depressed indefinitely".

Powder to overtake

There may, however, be a paradigm shift in the making which would make powder the more popular product.

Olam International, the Singapore-based agricultural trader, unveiling the $1.3bn purchase of Archer Daniels Midland's cocoa division, forecast that powder could be about to reverse its historically poorer popularity compared with butter.

Over the past decade, cocoa butter use as an ingredient has risen by 3.0% a year, ahead of the 2.8% increase in powder consumption.

But while an acceleration in demand for both products is on the way, it is powder which will lead the charge, with its use rising to average 4.3% a year from 2020-25, Olam believes.

That will far exceed growth in butter consumption, expected at about 3.8% a year.

'Emerging market growth story'

Growth in use of the two products is "beginning to converge", Gerard Manley is managing director of Olam's cocoa business, told investors, attributing the better prospects for powder to its popularity in developing countries.

"What is important here is that this growth is all in the emerging markets," with powder use in Western Europe "stabilised" at 650,000-700,000 tonnes a year.

Accelerating growth in world powder use is "really the emerging market growth story", with the region long taking its more of its cocoa in powder-heavy products, such as drinks and cookies, rather than the butter-heavy chocolate bars preferred in the West.

While emerging market cocoa butter use will grow, it is expanding from a low base, of 370,000 tonnes in 2013-14 – less than half that consumed in developed markets.

'Inflection point'

As for why emerging markets represent such promising areas for cocoa demand, it lies in part their huge potential for growing consumption levels even to a fraction of Western European levels.

Chocolate consumption in China, for instance, at 0.05 kilogrammes a year, is 1% of that in Belgium or Switzerland, at more than 5 kilogrammes a year.

But as these countries get richer, their taste for chocolate could grow faster than the broader economy.

When countries reach $15-20,000, in terms of GDP per head, that "is really the inflection point for consumption of chocolate", when consumption begins particularly rapid growth, Mr Manley said.


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