Figure 1
Ghana Cumulative Main-Crop Cocoa Purchases
Number of Weeks After Season Opening
Prepared by Prudential Securities, Inc.
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1996/97 Global Statistical Outlook Producer Overview West Africa Latin America Southeast Asia |
Bean Grindings Cocoa Stocks London/New York Cocoa Arbitrage Spot/Futures Price Movements Price Outlook |
The size of the global 1996/97 supply/use deficit remains the main focus
of market attention, with traders unable to agree on the extent of the
current-season stock drawdown. Another topic of market conjecture is the
intended disposition of the sizable cocoa tonnage held by a leading international
trade firm. Finally, the trade's attention is beginning to shift to 1997/98
production prospects. If the past is any guide, we can expect an avalanche
of new-crop estimates to move through the market long before more reliable
forecasts based on actual field surveys are released, ensuring once again
that this period will retain its well-deserved label, the "silly season."
When our most recent Quarterly Cocoa Outlook was published in late February, May futures were trading near $1,280 per tonne. At that time, we forecast a price advance to the $1,500 level based on our projected global 1996/97 supply-use balance; May futures exceeded our target, setting a contract high of $1,532 on April 2. Although prices have softened since then, values have remained substantially above their February levels. The market's relative price strength may be attributed to the following factors:
The heightened level of speculative participation has expanded both
open interest and trading volume. Starting from a level of 82,000 contracts
at the beginning of the year, open interest has expanded steadily, reaching
a record 105,561 on April 7; it currently stands near 94,000. Trading volume
also set a record on April 7, reaching 30,678 contracts and erasing the
previous record of 27,681 contracts set on March 1, 1996.
1996/97 Global Statistical
Outlook
We forecast an end-season stocks decline of roughly 110,000 tonnes due
to our expectation for global cocoa output of 2.7 million tonnes and cocoa
bean grindings of 2.8 million tonnes. This reduced stocks estimate compares
with our February projection of a stocks drawdown of 180,000 tonnes and
takes into account revised production data, based in part on the USDA's
March global cocoa survey. We have not changed our world 1996/97 grindings
projection since our February report. (E.D. & F. Man's latest report
projected the global 1996/97 deficit at 125,000-150,000 tonnes versus the
firm's earlier forecast of a 170,000-230,000-tonne stocks drawdown.)
The seven years beginning with 1984/85 were an unbroken period of stock
accumulation. In the years since then, year-to-year stock changes have
shown a more mixed pattern, with stocks expanding in two seasons (1993/94
and 1995/96) and contracting in the other four (including the current season
projection). Some researchers believe the global cocoa market has entered
a phase during which stocks deficits will be the rule rather than the exception.
Given that global cocoa stocks peaked in 1990/91 and appear to have begun
a steady, if unspectacular decline, any additional seasonal stock drawdowns
are likely to be more price-supportive than would otherwise be the case.
The new international cocoa year does not open until October 1. With
pod maturity still several months away, it seems that 1997/98 crop forecasts
made at this early stage are premature and little better than guesses.
Nevertheless, we should note favorable precipitation patterns induced early
tree flowering in West Africa, which accounts for about two-thirds of global
output. On the basis of this information, some market watchers have predicted
a 1997/98 Ivory Coast crop of about 1.1 million tonnes (unchanged from
the USDA's 1996/97 figure) and a regional outturn of about 1.7 million
tonnes (about 3% above current expectations for the region's 1996/97 cocoa
output). More recently, there has been concern that the weather outlook
is for drier conditions, which would hurt output. Obviously, West African
weather will remain a key market factor over the next few months.
The world's 10 leading producer nations, accounting for about 93% of global cocoa output, are ranked in Table 2. The table compares the latest 1996/97 production forecasts released by two sources, the USDA and the International Cocoa Organization (ICCO) and also shows production trends over the last four seasons. Production data for 1980/81 are included to provide a longer-range reference point.
The table underscores the Ivory Coast's continued dominance among global
producers; the country is forecast to produce about 1.1 million tonnes
in 1996/97, or roughly 40% of global output. The next two largest major
origins, Ghana and Indonesia, have a combined output that is only about
one-third that of the Ivory Coast's. Together, these three countries produce
about 66% of the world's cocoa.
The ICCO's latest 1996/97 production forecasts released at the beginning
of May contain two major revisions versus the February forecast: (1.) Ivory
Coast's production rose 125,000 tonnes; and (2.) Brazil's figure fell 30,000
tonnes. Similarly, the USDA raised its Ivory Coast 1996/97 figure by 75,000
tonnes and that for Indonesia by 45,000 tonnes since its initial projections
made in October 1996. The USDA's Brazil figure in March was unchanged from
the October forecast.
The major discrepancy between the two statistical sources is in Ghana,
where the USDA is forecasting an outturn of 390,000 tonnes, while the ICCO
is looking for 335,000. We believe that the ICCO's figure is the more believable
of the two (in our February quarterly report we forecast Ghana's 1996/97
output at 325,000 tonnes), and expect that the USDA will scale back its
Ghana figure in its next survey.
Ivory Coast cumulative arrivals were estimated at around 970,000 tonnes in late April, which compares with 1.03 million at the same time a year ago. Recent weather concerns have prompted various trade sources to lower their expectations for the country's summer crop (harvested roughly May-June) to the 100,000-tonne level versus earlier projections that were as high as 180,000 tonnes and last year's record near 200,000 tonnes. If the Ivory Coast summer crop turns out to be only 100,000 tonnes, it will signal an overall Ivorian 1996/97 crop that is roughly 150,000 tonnes below the year-ago level, which the market would view constructively. According to E.D. & F. Man's May report, the early new-crop pod setting was the weakest observed since 1983. These constructive price views would be greatly reinforced if West Africa were to receive suboptimal rainfall over the next several months.
Trade sources have been generally satisfied with the quality of Ivory
Coast's 1996/97 main crop cocoa beans. The country's export standard is
105 beans per 100 grams; the average bean count has been running at about
101, but bean size reportedly was decreasing at the tail end of the crop.
Mid-crop beans are not expected to match the quality of last year's summer
harvest.
E.D. & F. Man has projected Ivory Coast's 1996/97 bean grindings
at 165,000 tonnes (about 60% of West Africa's combined processed bean output),
up from 135,000 tonnes processed the previous season. The government has
stated that it hopes to see half the country's annual bean production processed
domestically by 2000, a target we believe is unachievable. Ivory Coast's
government recently agreed to have French interests construct two processing
facilities this year with combined capacity of about 90,000 tonnes; the
cocoa butter and powder these factories will produce is intended for export
to China.
Ivory Coast's Commodities Minister recently announced he would visit
Brazil in late June to discuss a cooperative scheme designed to "improve"
cocoa prices. We very much doubt he will be able to enlist Brazilian support
in any such undertaking.
Ivory Coast's foreign debts have reached a burdensome $17 billion. The
government is negotiating with the International Monetary Fund (IMF) for
relief under the IMF's Highly Indebted Poor Countries debt program, and
could ultimately see up to 80% of its debts erased. To win IMF debt relief,
however, the government will have to implement a three-year economic program
aimed at greater privatization and "liberalization" of the national
economy. It is unclear how these structural changes will affect the cocoa
sector. However, some of Ivory Coast's foreign customers have misgivings
that some of the proposed policy changes will hurt bean quality and distort
traditional shipping schedules.
Ghana is the world's second-largest cocoa producer. Ghana's cumulative main-crop purchases for 1996/97 and the 1995/96 season are depicted om Figure 1. The purchasing season was officially closed on April 3, and apart from relatively minor statistical adjustments it is unlikely that final purchase data will be changed. Ghana's Cocoa Board is forecasting total 1996/97 output at 330,000 tonnes, which is in line with independent trade forecasts.
Based on Ghana Cocoa Board data.
Brazil is Latin America's dominant cocoa producer and the world's fourth
leading origin. The country's growing areas, located mostly in Bahia state,
have been devastated by crop disease (mainly witches' broom), insufficient
economic inputs and farmer neglect to the point that annual production,
which peaked in 1984/85 at around 415,000 tonnes, is forecast at less than
200,000 tonnes in 1996/97 (Table 2). There is trade talk that Brazil will
import about 30,000 tonnes of cocoa this year in order to keep its cocoa
bean processing industry operating at optimal levels.
Table 3 shows the long-range trend in Brazilian cocoa production, broken
down into the two yearly harvesting periods. Brazilian trade sources are
projecting the current Temporao crop at about 1 million bags, down from
1.7 million the previous year.
1 May-April
2 October-September
3 Estimated
4 Forecast
Source--Bahia Cocoa Trade Commission
Brazil's Ministry of Agriculture recently announced that $800,000 in government funds would be released to help the cocoa sector eradicate witches' broom disease. The United Nations is contributing $2.4 million to help develop new strains of disease- resistant cocoa trees. The situation's gravity was underscored in March when agronomists associated with the Cocoa Planning Executive Committee (CEPLAC) acknowledged that it might take another five years before the production decline could be reversed.
Although Ecuador is Latin America's second leading origin, its output
is virtually insignificant in terms of the global statistical picture.
Statistics aside, however, Ecuador remains an important producer in that
much of its cocoa bean output has unique aroma characteristics that are
valued by various specialized chocolate manufacturers.
A decline in Ecuador's bean quality caused the government to establish
last year the Exchange for Agricultural Products to monitor export quality.
In January, the Exchange declared that 43% of cocoa shipments were below
national standards and accused exporters of trading in "garbage."
Exporters responded by saying they would honor existing contracts, but
would not enter into new commitments until the government establishes a
new watchdog to supervise quality standards. The threat of an export boycott
is not being taken seriously in consumer markets, which assume financial
pressures probably will force Ecuador to maintain regular shipping schedules.
Indonesia displaced Malaysia as Asia's leading cocoa producer in 1992/93,
and has seen its production continue to grow, while that of its chief regional
rival has declined. Indonesia's output is forecast to reach a record 325,000
tonnes in 1996/97, up 18% from the previous year. A recent U.S. agricultural
attache' report attributes the increase to an expansion of total cocoa
acreage and an increase in the number of bearing trees.
Because of quality problems, Indonesian cocoa entering the United States
has been automatically detained by the Food and Drug Administration, imposing
additional costs on exporters. Hoping to rectify the situation (and enhance
the image of their product), Indonesian exporters are planning to hire
an "internationally recognized fumigator" and will intensify
pre-shipment cocoa inspections. The United States is the leading market
for Indonesian cocoa beans, accounting for roughly 35% of the country's
bean exports in 1995/96.
In contrast to Indonesia, Malaysia's production peaked at about 240,000
tonnes in 1989/90 and has fallen steadily to an estimated 120,000 tonnes
in 1996/97. A major reason for the decline is the abandonment of cocoa
cultivation by estate owners, who are replacing cocoa trees with oil palms
(the profit margin for palm oil is about 2.5 times that of cocoa). Another
problem facing Malaysia's cocoa sector is a general labor shortage. The
chairman of the Sabah Cocoa Dealers Association has conceded that Malaysian
bean quality has deteriorated, noting that farmers lack the resources (or
incentives) to raise quality standards.
It is now generally accepted that the El Nino phenomenon will occur
this year. That is potentially bullish for the cocoa market because an
El Nino tends to bring dry weather and above-normal temperatures to Malaysia
and Indonesia and could hurt cocoa output in these countries.
In comments made at the March conference of the Cocoa Merchants' Association,
a representative of E. D. & F. Man foresaw world cocoa consumption
increasing at an annual rate of about 4% over the next five years. We agree
with that outlook, which is in line with the global consumption growth
of the last five years. If world bean grindings are used as a proxy for
global cocoa consumption, then usage has expanded about 3.4% per year from
1991/92 to 1995/96. Only in the first of these seasons did grindings dip
relative to the previous year; the highest annual growth rate during this
period was 6.5%, recorded in 1992/93.
We are projecting global 1996/97 grindings at 2.78 million tonnes, about
3.4% above the year-ago level. Our projection is slightly below the ICCO's
May forecast of 2.80 million, which was down from its February forecast
of 2.82 million tonnes.
The ICCO's May survey confirms that Russia, a potentially major consumer
market, has been unable to substantially bolster its bean-processing activity.
The survey shows Russia's grindings were 75,000 tonnes in both 1994/95
and 1995/96, and are forecast at 80,000 tonnes in 1996/97. We have no accurate
Russian cocoa product import data.
Quarterly grindings statistics for the leading importer nations-- Except
for the U.S. number, first-quarter 1997 grindings were in line with general
trade expectations. U.S. first-quarter grindings, at 95,435 tonnes, were
20.7% above the year-ago level. It is likely that the strong figure was
partly due to declining imports of processed bean products, particularly
from Brazil.
Although cocoa traders may disagree about the size, ownership or quality
of stocks at a specific location, there is broad unanimity that world cocoa
stocks have been on a seemingly relentless expansionary path. This trend
is depicted in Figure 2, which shows the global stocks profile since 1970/71.
While global cocoa stocks are lower than they were in the early 1990s,
they remain historically large. The high stocks level is the principal
explanation for the cocoa market's seeming inability to stage a sustained
price recovery.
U.S. cocoa stocks reached an all-time high of 4.5 million bags in July
1996, and end-April stocks were reported at 4 million bags, up about 5%
from year-ago levels. With the exception of the fourth quarter of 1995,
monthly cocoa stocks in the United States have held above 3 million bags
since early 1993. Stocks have been above 1 million bags since the second
quarter of 1990.
Western Europe's cocoa stocks also remain at burdensome levels. Combined
cocoa inventories held at warehouses in Amsterdam and Rotterdam (Holland),
Antwerp (Belgium), Hamburg and Bremen (Germany) and the United Kingdom
were reported at 949,395 tonnes as of the end of April; this was down about
26,000 tonnes from the previous month, but an increase of 31% since the
beginning of the year.
London/New York Cocoa
Arbitrage
There has been considerable movement in the London/New York arbitrage this year. In mid-February the arbitrage was around $130 per tonne, widening to about $240 by mid-April on expectations that a leading trade house might keep a substantial cocoa tonnage off the market; subsequent weakening of the arbitrage indicated some traders expected the firm to reduce its long exposure. More recently, the arbitrage has been in a range of about $200-$230.
The New York/Ivory Coast differential was about $184 per tonne in April.
The differential has held steady so far this year, with average monthly
values ranging between $176 and $184. The cocoa butter ratio trend, which
has recently stabilized near 2.8:1 after falling from about 2.85:1 last
October. The softer tone reflects weaker demand and lower European values.
As we go to press, traders are again voicing concern about the Ivory
Coast's 1996/97 summer crop, which is now seen at about 100,000 tonnes,
half of the previous season's 200,000-tonne output. If this is confirmed,
it would reinforce the bullish view that the global 1996/97 supply/use
deficit may be close to 150,000 tonnes. There is also renewed concern that
drier weather conditions now being reported in West Africa could translate
into a delayed 1997/98 Ivory Coast main crop. While the region's rainfall
shows a seasonal decline during July and August, it is clear that overall
weather conditions in West Africa will remain a major, and potentially
bullish, factor over the next quarter.
Another potentially price-supportive factor for cocoa is the presence
of an El Nino. This phenomenon is likely to translate into above-average
temperatures in important cocoa-growing areas of Brazil, Malaysia and Indonesia,
and would also make for drier-than-normal conditions in Malaysia and Indonesia,
possibly hurting cocoa output in these origins. Large-scale release of
cocoa being held by a leading international trade house would be a potentially
negative development.
We are cautiously bullish. Based on our current production outlook,
we expect nearby futures prices to advance to the $1,650 level over the
next two to three months.
June 1997
Prudential Securities
1 New York Plaza,
New York, New York
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