Cocoa Market Update

By Alice Birnbaum, Assistant Vice President

Cocoa bean prices reached a 10-month peak of $2,724 per

metric ton in September 2012, amid supply concerns in the
Ivory Coast, the worlds largest cocoa exporter. The concerns
stemmed from the Ivorian governments major reform of its
cocoa marketing system in early 2012. As part of the reform, the
government sold forward over half of its estimated 2012/2013
cocoa crop via auctions. Market concerns over farmers successful delivery under fixed-price, auction-related contracts in
a rising price environment caused bean prices to soar 34.3%
over the nine months ended 9/7/2012.
Starting in November 2012, prices began to slide as the
International Cocoa Organization (ICCO) released revised projections of world cocoa production and grindings (a term that
refers to the initial step of producing cocoa liquor, and is thus
used to approximate consumption) for crop year 2011/2012. The
new estimates project a net surplus of 90,000 metric tons after
initial estimates called for a net deficit of 19,000 metric tons.
As a result, the ratio of cocoa stocks to grindings increased to
47.5%, versus the prior projection of 44.5%.

According to Reuters, a key factor in the success of the Ivorian

auctions was the announcement of the farm gate price (the
minimum price guaranteed by the government) of $1.41 per
kilogram ($1,410 per metric ton), a 9.0% increase over the
2011/2012 average farmers sale price and thus generally well
received by producers.
Meanwhile, after a steady three-year decline which ended in late
2011, cocoa butter a key derivative product of cocoa beans
used to manufacture chocolate began a dramatic rebound in
the second half of 2012. Cocoa butter prices nearly doubled
from $2,396 per metric ton at 6/22/2012 to $4,454 per metric
ton at 2/1/2013. With bean prices up only 5.3% over that period,
the butter/bean ratio (the multiple at which cocoa butter trades
to the LIFFE or ICE cocoa bean contracts) nearly doubled from
1.14x at 6/22/2012 to 2.02x at 2/1/2013. This marked the first
time the ratio exceeded 2.0x since January 2010.
The rebound in the butter/bean ratio was largely driven by a
reduction in supply of semi-finished cocoa products (liquor, butter, and cake) as grindings decreased year-on-year in the second
quarter of 2012 by 9.8% in the U.S. and by 18.0% in Europe.
Processors reduced grindings leading up to that period, as pressing margins fell below breakeven rates for many producers due
to excess global processing capacity and weakened demand in
Europe and North America.

The revised projections were influenced by Ghana (producer

of approximately 30-40% of global cocoa supply) aggressively
selling its latest crop into a market in which cocoa processors
were already sufficiently covered. Compounded by the unforeseen success of the Ivory Coast auctions, prices declined by
18.1% over the five months ended 2/8/2013.

The global cocoa market is currently awaiting official estimates

from the ICCO for the 2012/2013 harvest season, which concludes in March 2013; preliminary projections in the market call
for a deficit of over 100,000 metric tons, which could support
bean prices in the coming year.

Cocoa Bean Fundamentals...

... Supporting Butter/Bean Bounce

Gross Crop (right)

Grindings (right)

Cocoa Bean Price (left)

Stocks/Grindings (left)
55.0%

5,000
4,500

50.0%

3,500
3,000

45.0%

2,500
2,000
1,500

40.0%

1,000
500

3.50x

$3,500

3.00x

$3,000
$ per Metric Ton

000's of Metric Tons

4,000

Butter/Bean Ratio (right)

$4,000

2.50x

$2,500

2.00x

$2,000
1.50x

$1,500

1.00x

$1,000

0.50x

$500

35.0%
2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

Source: Bloomberg, ICCO, BBH Analysis

22 C O M M O D I T Y M A R K E T S U P D A T E

2008/09

2009/10

2010/11

2011/12
(e)

$0
Jan-00

0.00x
Jul-01

Jan-03

Jul-04

Source: Bloomberg, BBH Analysis

Jan-06

Jul-07

Jan-09

Jul-10

Jan-12

Cocoa Production Process

Cocoa Beans
Cleaning
Shelling

Waste Water and Shells

Roasting
Winnowing

Roasted Nib

Grinding
Refining

Mass or Liquor

Pressing

Pressing

Cocoa Cake

Cocoa Butter
Mixing

Milling

+ Sugar & Milk

Conching

Sieving

Powder

Grinding

Chocolate

Butter

Second Quarter 2013 23

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