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Cocoa prices - will they recover in 2018 from their weakest year-end close since 2006?

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Cocoa prices had a poor year in 2017, dropping 11% in New York, undermined by strong West African production, which drove the world back into production surplus.

 

According to the International Cocoa Organization, the 2016-17 surplus amounted to 371,000 tonnes, more than making up for the 174,000-tonne output shortfall the previous season.

 

However, weak prices have stimulated demand and, through disincentivising farmers, curtailed expectations for Cote d’Ivoire output this season.

 

Could this bring better times for cocoa futures, which in 2017 recorded their lowest year-end price since 2006?

 

Leading commentators give their views.

 

 

ABN Amro

"The chance of another record-breaking season [for West African productuion] is small as last season the weather conditions were ideal.

 

"Moreover, a growing number of trees are becoming relatively old and therefore bearing less fruit.

 

"In addition, Ivory Coast is currently reining in illegal cocoa production in its protected forest areas in order to prevent further deforestation. This government crackdown is to be completed within five years, but the process will be gradual and scrapped production capacity in protected areas will be replaced at other sites.

 

"Higher demand and lower supply will push up prices in the coming period. Yet, cocoa stocks are still relatively high, making an upward price breakout unlikely.

 

"But the signals do point to higher rather than lower prices. ABN Amro expects a cocoa price of $2,300 a tonne at year-end 2018."

 

 

Citi

“We see a large 2016-17 market surplus swinging closer to balance in 2017-18, on lower West African supply and improved grindings.

 

“Ivory Coast and Ghana account for about two-thirds of the world harvest, and production for both countries may drop by about 5-7% year on year to 1.9m tonnes and 0.9m tonnes, respectively.”

 

“After negative grindings growth in both 2014-15 and 2015-16, cocoa demand grew about 5% in 2016-17 and may grow 3.6% during the new-crop campaign.

 

“The roughly 50% peak-to-trough drop in cocoa prices in the past few years to $1,800-a-tonne levels in mid-2017 has clearly incentivised cocoa processing growth, based on regional data from North America, Asia and the EU industry groups.

 

“Indeed, we see the global cocoa stocks-to-grinding ratio falling to 44% in the next year versus our previous assessments closer to 47%.

 

“Based on the tight inverse relationship between year-on-year changes in the mean seasonal ICE cocoa price and the ratio over the past 35 years, we expect ICE trading to maintain a bid north of $2,000 a tonne on average in the next year, mostly hovering in a $2,100-2,200-a-tonne range, before rising to $2,200-2,300 a tonne in 2019.”

 

 

Commerzbank

“Rather than factors on the supply side, it has rather been the growing demand that has ensured that prices have been on an upward path for months until November (Chart 18).

 

“Demand has been driven above all by the producer countries themselves. Meanwhile, there is also optimism in the industry regarding the 2017-18 season, as the market for chocolate products has grown again in the last two quarters for the first time in ages, and grinding margins have improved considerably.

 

“If this meets with weaker supply trends in the 2017-18 season that has now begun, prices are likely to pick up further.

 

“[For top producing country Cote d’Ivoire] initial production forecasts – courtesy, for instance, of the Ivorian Coffee and Cocoa Board in September – suggest that the season as a whole will be significantly down.

 

“After a good 2m tonnes last year, 2017-18 may see only around 1.75m tonnes of cocoa harvested.

 

“The price slump that continued into the spring is now having an effect… making it difficult for farmers to buy production equipment such as fertiliser and pesticides for some time now, making it easy for fungal diseases to take hold recently given excessive rainfall.”

 

“For the fourth quarter of 2018, we forecast a cocoa price in New York of $2,300 per tonne.”

 

 

Goldman Sachs

“Given our bullish global growth forecasts, we expect the strong grindings trend to continue.

 

“A much lower price level versus just two years ago should also help to boost demand significantly, given the more discretionary nature of cocoa consumption.

 

“However, while 2017-18 supply is very likely to decline – due to excessive rainfall and lower fertilizer application – we still believe that demand may take some time to catch up with the inventory overhang, and prices could remain low for longer.

 

“Accordingly, we maintain our forecasts broadly flat, at $2,000 a tonne over a 12 month horizon.”

 

 

Rabobank

“Cocoa prices showed a downward trend until Cote d’Ivoire announced it was cutting the fixed price paid to farmers by 36%.

 

“The current price of 700 SFA francs per kilogramme will discourage harvesting effort in the main 2017-18 crop, and will also result in lower fertilizer use for the mid-crop and next year’s main crop.

 

“With this in mind, our production forecast for Cote d’Ivoire in 2017-18 is pegged at 1.83m tonnes, down from 2.0m tonnes in 2016-17.

 

“In our base case, we expected global grindings to increase by 2.3% in 2017-18. This is rather optimistic, but processor margins remain very high.

 

“In our base case scenario, we envisage three consecutive global surpluses – 0.3m tonnes in 2016-17, 0.13m tonnes in 2017-18 and (a very preliminary) 0.06m tonnes in 2018-19.

 

“These surpluses look smaller than they did two months ago, but large stocks should prevent any spikes in prices.”

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