The drive by Cote d’Ivoire and Ghana to boost cocoa prices for their farmers is “laudable” in aim, but “flawed” in its implementation, Marex Spectron said, foreseeing it ending up in overproduction.
Jonathan Parkman, joint head of agriculture at Marex, and a respected cocoa market commentator, said that the immediate impact of the pact by Cote d’Ivoire and Ghana not to release cocoa below $2,600 a tonne would indeed be to support prices - as the countries are aiming for.
While there remain some details to the plan to be ironed out, including at a meeting with processors Barry Callebaut, Ecom and Sucden in Abidjan next month, the short-term impact will be to support cocoa prices.
The floor price of $2,600 a tonne, aimed at exceeding farmers’ cost of production, and equivalent to £2,050 a tonne on the London market, compares with September futures prices of $2,475 a tonne in New York on Wednesday, and £1,830 a tonne in London.
‘No choice but to pay up’
“The minimum price equates to a futures price roughly £200 a tonne above current levels,” Mr Parkman said.
However, “cocoa processors will have no choice but to pay up”, given the importance of the two countries in world production, with Cote d’Ivoire alone seen producing 2.2m tonnes of the 4.8m tonnes of world output in 2018-19.
This effect is only amplified by processors being “pretty much locked in” to Cote d’Ivoire and Ghana output by, for example, sustainability drives and pledges for support to the country’s cocoa industries.
Indeed, such has been the demand for Cote d’Ivoire and Ghana cocoa that bean stocks in these countries have not increased, even amid a period of world production surpluses, although an excess which Marex put at “small” for 2018-19.
Grinders are “generally having to lump it for the moment and go along with it”, Mr Parkman said.
‘Laudable, but flawed’
However, longer-term, the minimum price scheme will “lead to over-production and a structural surplus”, as the higher values enforced in the market stimulate output “in all countries”.
With cocoa trees taking five years from planting to start producing pods, this is “not something that could realised very quickly”, Mr Parkman said.
But it is “likely to lead to surpluses in production” in Cote d’Ivoire and Ghana especially as buyers turn to countries where they can buy beans cheaper.
“People will try to buy as little, rather than much, of their cocoa” from the two countries.
While, for the farmer support scheme, the “goal is laudable, the mechanism is flawed, he said, adding that it would have been better if the floor price were “set at a level that did not stimulate over-production”.
“This is likely to do just that.”
‘Eating more chocolate’
He added that South America, where cocoa output is already in an uptrend, was likely to be one area that saw some knock-on benefit from the price floor scheme.
He named Ecuador, as well as Cote d’Ivoire, as a country showing an increasing trend of cocoa output, rising at similar rate – although in the case of the south American country from a small base to some 300,000-330,000 tonnes.
Cote d’Ivoire output was seen up some 100,000 tonnes year on year.
Demand, meanwhile, was “broadly keep up with production”, although largely thanks to increased production in developing countries, which account for some 30% of demand, where consumers are “eating more chocolate per se”.
In areas such as western Europe, consumption growth was limited largely to changes in demand for higher cocoa content products.
Goldman Sachs last week also cited the Cote d’Ivoire and Ghana pact as a support for prices, as it lifted by $200 a tonne to $2,600 a tonne its forecast for New York spot futures values on three-, six- and 12-month bases.
“Producers, buyers and the governments of the Ivory Coast and Ghana, which together account for about half of global cocoa trade, have recently agreed on a price floor of $2,600 per tonne to support cocoa farmers.
“While some details remain to be resolved at a meeting between the parties later in the summer, we see this as a bullish signal for cocoa prices.”