Cocoa Prices Hit 33-Year High

Cocoa demand has outstripped supply for the fourth consecutive year due to declining production in Ivory Coast, while demand starts to recover after the worst of the financial and economic crisis.

27 Apr 2010 --- Cocoa prices on Monday hit a 33-year high on the back of improving demand from the chocolate industry and a disappointing crop in Ivory Coast, the world’s largest grower. The combination sent the benchmark Liffe July cocoa contract to £2,365 a tonne, the highest level for the second front-month contract since October 1977. Cocoa demand has outstripped supply for the fourth consecutive year in the 2009-10 season, marking the longest shortage period since 1965-69, due to declining production in Ivory Coast. The west African country accounts for nearly 40 per cent of the world’s cocoa output.

Traders and analysts said Ivorian cocoa trees, planted more than 25 year ago, have already passed their peak of productivity and, without new planting, production in the country is likely to drop every year, tightening the global market as demand rebounds. “The cocoa trees in the Ivory Coast are very old and very disease prone,” said Kona Haque, an agricultural commodities analyst at Macquarie in London.

The industry is braced for higher prices as the drop in supplies comes just as demand starts to recover after the worst of the financial and economic crisis. Hershey, the US confectioner, and Nestlé, the Swiss food group that makes KitKat chocolate bars, both reported better-than-expected results for the first quarter last week. The improved sentiment from chocolate makers chimes with data on cocoa grindings, a measure of demand. US cocoa bean processing rose 16 per cent in the first quarter of 2010 from a year earlier.

Tobin Gorey, soft commodities analyst at JPMorgan in London, said that stronger end-demand, as opposed to simple inventory rebuilding, could tighten the starting point for the next set of crop worries. “Reflecting the demand-only drivers, prices have rallied,” he said.

There are hopes that a long-delayed election in Ivory Coast might bring a change in policy towards cocoa farming and spur investment and re-planting in the country, but, in general, the industry is pessimistic.