Demand for cocoa, the key ingredient in chocolate, is widely expected to surpass supply in the current crop year, helping prices to recover some of the ground lost last year, a Reuters poll of 20 analysts and dealers showed.
Output from the Ivory Coast and Ghana, the world's two-largest producers, is forecast to drop nearly 12 percent from the International Cocoa Organisation's (ICCO) 2010/11 estimate, which combined with steady demand will help the market return to a deficit of about 100,000 tonnes, analysts predict. That will be a significant relief to the market that came under severe pressure last year on a record surplus and as political tensions in West Africa eased.
But the price increases predicted by analysts and dealers - 10 percent in New York and 15 percent in London - will not make up for the 30-percent plunge in 2011 and they don't see any improvement before the end of March. "If we actually go to deficit without political instability, then it really doesn't qualify us to tear up into the heavens again," said Hector Galvan, senior market strategist for RJO Futures in Chicago.
US cocoa futures soared to a 32-year high at $3,774 per tonne in February 2011, as a presidential election dispute in top grower Ivory Coast spurred a civil war and led to an export ban. The conditions that created last year's record surplus were a one-off, with the ensuing low prices expected to dent investment in cocoa production, analysts agreed. The survey estimated a median of a 100,000-tonne global cocoa deficit in the 2011/12 crop year (October/September), with projections ranging from a 300,000-tonne deficit to a 123,000-tonne surplus.
This compares with the record global cocoa surplus of 341,000 tonnes estimated by the ICCO for the previous crop year 2010/11. Such was the extent of overproduction due to ideal crop conditions, that some analysts even consider this estimate too low. "Demand from Asia for cocoa powder will continue and the market will now be driven by cocoa powder demand and not by cocoa butter demand," said Shawn Hackett, of Hackett Financial Advisors in Florida, echoing a sentiment expressed by many in the survey.
The world's biggest cocoa grower Ivory Coast is expected to produce 1.365 million tonnes in 2011/12, down 10 percent from the ICCO's 2010/11 forecast of 1.511 million tonnes. Poll estimates ranged from 905,000 tonnes to 1.6 million tonnes.
No 2 grower Ghana is seen producing 875,000 tonnes, down a larger 15 percent from the ICCO's 2010/11 estimate of 1.025 million tonnes. Poll estimates ranged from 800,000 tonnes to 965,000 tonnes. Low prices typically mean that many farmers will not invest in fertiliser, which boosts yield, and can encourage a switch to other more lucrative crops, such as rubber.
The poll forecast that cocoa futures prices are expected to remain little changed by the end of the first quarter but will rise by the end of the year, as many expect that demand will remain intact even amid the global economic problems. The median projection for the ICE spot cocoa futures pegged the contract will rise only 1 percent to $2,300 per tonne by the end of March, from Monday's settlement at $2,269, and will climb 10 percent to $2,500 by the end of 2012. This estimate of $2,500 will be up 18.5 percent from the end of 2011.