Powder buyers have been holding back their purchases waiting for prices to fall further; “As long as they don’t sell the powder, pressers bring the butter price to a level whereby most of the processing cost is covered by butter sales”

Record Chocolate Sales Boosting Cocoa Demand to Leave Shortages

Record chocolate sales are boosting cocoa demand and prices as bean supplies lag behind demand for a second year.

Output will be 129,000 metric tons smaller than demand in the 12 months starting Oct. 1, Euan Mann, director at the London-based Complete Commodity Solutions Ltd., said at the European Cocoa Conference in Istanbul this week. That follows a shortage of 119,000 tons a year earlier. Chocolate sales volume will rise 6.2 percent to a record $117 billion next year, researcher Euromonitor International Ltd. in London estimates.Demand for cocoa beans will jump 3 percent to 5 percent in 2013-14, Peter B. Johnson, chief executive officer of Fehrbellin, Germany-based cocoa processor Euromar Commodities GmbH, said at the conference. Futures rose to the highest in almost a year in London to 1,685 pounds ($2,674) a ton on S pt. 5, entering a bull market. The cost of cocoa butter relative to beans in Europe jumped to the highest since 2008 last month. Butter accounts for 20 percent of the weight of a chocolate bar.

“The reports that we’ve seen in the U.S. show that for the first time in quite a while, the consumer data looks positive,” Kip Walk, corporate director of cocoa and sustainability at Blommer Chocolate Co., North America’s biggest processor, said in an interview in Istanbul today. “I’d say that seeing the rapid increase in butter ratios over the past year or so would underscore the fact that demand for chocolate products would be on the increase.”

Cocoa Prices

Cocoa gained 17 percent in London and 16 percent in New York this year. The beans are the second-best performer in the Standard & Poor’s GSCI gauge of 24 raw materials, after oil. Prices climbed as demand improved in developed economies just as dry weather threatened to cut output in West Africa, the main growing region accounting for 70 percent of global supply.

Global sales of chocolate confectionery will gain 2 percent this year and the next after rising 1.4 percent in 2012, estimates Euromonitor International. Chocolate demand in China will expand 11 percent annually in the five years to 2018, 13 percent in Brazil, 22 percent in India and 8 percent in Eastern Europe, said Frank Day, vice president of commodity operations for The Hershey (HSY) Co., maker of Hershey Kisses and Reese’s Peanut Butter Cups.

“I’m optimistic on demand,” Day said. “I think that will keep some firm legs underneath the cocoa market.”

The cost of cocoa butter relative to bean prices rose to 2.65 to 2.75 times the futures on NYSE Liffe at the end of last month, said three traders with direct knowledge of the sales. That was the highest since 2008, when the ratio was at 2.66 on Dec. 12 and 2.79 on Oct. 31, according to data on the website of KnowledgeCharts, a unit of researcher Commodities Risk Analysis in Bethlehem, Pennsylvania.

Butter Ratios

The surge in butter ratios “took people by surprise” as the consensus was that demand in emerging markets would mean a market driven by cocoa powder, another byproduct of bean processing used in ice cream and baking, said Pamela Thornton of Armajaro Asset Management LLP, a hedge fund in London. Consumers in emerging markets are starting to develop a taste for real chocolate, said Amine Berrada, general manager at Casablanca-based Compagnie Cherifienne de Chocolaterie.

Cocoa butter ratios climbed 32 percent in Europe this year while powder prices tumbled 43 percent to 1,478 euros ($1,963) a ton, according to KnowledgeCharts data. Powder buyers have been holding back their purchases waiting for prices to fall further, said Lukas Jasman, chief operating officer of the Tangerang, Indonesia-based grinder PT Bumitangerang Mesindotama, known as BT Cocoa.

“As long as they don’t sell the powder, there’s an incentive for pressers to bring the butter price to a level whereby most, if not the totality of the processing cost, is covered by butter sales,” said Damien Thouvenel, a cocoa trader at Paris-based Sucres et Denrees SA, known as Sucden. “In theory, that could mean butter ratios above 3.”

Combined Ratio

Higher costs for cocoa butter mean that processors’ profitability, or the so-called combined ratio, has improved and that will bring more capacity on stream and increase supplies, Mann of Commodity Solutions said.

Prices, currently at 1,678 pounds a ton in London, will need to rise to 1,800 pounds to 2,220 pounds a ton to ensure that supplies meet or exceed demand, creating a “sustainable cocoa market,” Mann of Commodity Solutions said. Cocoa is “too cheap” considering costs and labor required, said Amit Suri, chief operating officer of Olam International Ltd. (OLAM), who is based in London for the Singapore-based company.

“The Hershey company is very optimistic about demand growth around the world and in emerging markets,” Day said. “To meet this demand growth the origin countries will have to modernize cocoa and increase production. That will be good for the cocoa farmer.”

To contact the reporter on this story: Isis Almeida in London at ialmeida3@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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