Top cocoa trader Olam warns of global deficit
Posted by Labels: 2011 News, Cocoa, Futures Cocoa and Coffee(Commodities Now) Leading cocoa trader Olam International Ltd warned on Monday of a tightening global market in 2012, with supplies moving into deficit after this year's record surplus drove prices too low. Spot cocoa futures prices in New York and London surged 10 percent off their session lows after Gerry Manley, the head of Olam's cocoa division, told Reuters he expects world 2011/12 production to fall around 100,000 tonnes short of grindings. Other traders have generally seen the market as balanced.
"We think there's a likelihood the deficit could increase; the arrivals at the moment look good and we believe that's because of some carry over from last year," he said, forecasting a dramatic drop in arrivals from January onwards.As one of the world's four biggest traders of cocoa, Olam has a nearly unrivaled view of the opaque and secretive market, which is the year's second-worst-performing commodity after fears of a lengthy civil war in top producer Ivory Coast yielded to a surplus of supply. The news fueled a rash of short-covering as traders bet the slump had gone too far.
NYSE Liffe cocoa futures , which had fallen by as much as 45 percent since the height of unrest in Ivory Coast in March, touched an over three-year low of 1,287 a pound on Monday before rebounding 10 percent to close sharply higher.
Manley said the market was oversold due to the size of the 2010/11 surplus and the expectation of forward crop sales from Ivory Coast in the wake of their planned cocoa sector reforms.
"Given the fundamental story, the outlook for next year as we see it, and given some uncertainty with the macro side of the picture, particularly in Europe, we think a price range of 1,600 to 1,700 pounds is a more realistic value," he said. Olam's view is more bullish than the norm. Commodities broker Marex Spectron said a month ago that it expected a supply surplus of 32,000 tonnes, while the International Cocoa Organization said in late September it expected a balanced market. The ICCO hasn't provided a more recent forecast.
Manley said the 2010/11 global surplus, which Olam estimates at 500,000 tonnes, has contributed to strong port arrival figures in the world's top producer Ivory Coast, which is currently shipping its 2011/12 main crop. Cocoa arrivals at ports in top grower Ivory Coast reached 422,430 tonnes by Dec. 4, up from 400,043 tonnes in the same period a year ago, according to data from Bourse du Cafe et Cacao (BCC) obtained by Reuters on Friday.
FALL IN IVORY COAST
Olam expects Ivory Coast's main crop to fall to just over 1 million tonnes in 2011/12, down from 1.35 million tonnes the previous year, when ideal weather boosted West African output.
Grindings growth, an indicator of demand, was forecast at 3 percent in 2011/12, mainly driven by emerging market demand for cocoa powder, Manley said. When a cocoa bean is processed it makes roughly equal parts butter and powder. In recent years powder demand has outpaced butter demand due to most of the cocoa products consumed in emerging markets being powderbased including chocolate-flavoured cakes and ice cream.
The weaker demand for butter has led to cheaper prices for what was once the premium cocoa product. "We still believe that butter stock is being added to, but less so than in the past, and we do believe at these price levels there is much better offtake for butter," Manley said. "It's very marginal but there is some small switch back from substitutes and some replacement for other fats. As an outright price it's hard to believe butter could go too much lower than this."
IVORY COAST REFORM
Part of Ivory Coast's cocoa sector reform plans include an intention to sell forward up to 80 percent of their crop. However, Manley said that at current price levels it would be surprising if the 2012/13 crop was sold forward.
"We don't see why they would like to commercialize the crop at levels that wouldn't give their farmers a good price in the future," Manley said.
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