Big African Cocoa Crop Makes Chocolate Rebound More Crucial

(Bloomberg) -- West Africa’s cocoa giants are gearing up for what looks like another big harvest, putting further focus on whether a post-Covid demand recovery can absorb a glut built up over the past year.

The main-crop harvest officially begins Friday Ivory Coast and next week in Ghana, the world’s two top exporters of cocoa, accounting for about two-thirds of global production. While their combined output is expected to fall in the new season, it’ll remain historically large, according to the countries’ regulators and analyst estimates.

Too much supply weighed on prices since the pandemic began, though signs of improving chocolate demand have helped London futures rebound 17% since mid-July. The global market is seen moving into a shortage or being balanced over the coming year, with Asia remaining a key driver, Rabobank said. 

Ivory Coast reduced its main-crop farmgate price 18% to 825 CFA francs ($1.46) per kilogram Friday compared with a year earlier. Ghana, which has seen unsold beans pile up following slower overseas demand, kept its minimum price steady at the equivalent of $1.71 per kilogram, its Minister of Food and Agriculture Owusu Afriyie Akoto also announced Friday. The second-biggest grower will start its new season on Oct. 8, he said. 

The gap between the farmgate prices in the two countries could encourage smuggling. It may create an arbitrage where middlemen buy beans in Ivory Coast and then sell them at a higher price in Ghana, Godfred Bokpin, a finance professor at the University of Ghana, said by phone from Accra.

Another big talking point in the market has been how the sector will fare with a $400-a-ton premium brought in a year ago to support farmers. The charge came into effect just as lockdowns hurt consumption, prompting middlemen to pay less than the government-set minimum price and accusations that some big chocolate companies tried to skirt the premium. 

The International Cocoa Organization pegs the global surplus at 230,000 tons for the season just ended, though the market may be tighter in the next year.

“It’s estimated at the moment that demand will outweigh supply, or for the market to be fairly well balanced,” Rabobank analyst Andrew Rawlings said. “Asia has been the force of the demand engine and it’s likely to continue to be. The U.S. has also had quite a good recovery, although the European Union is kind of lagging.”

Harvest Prospects

Ivorian and Ghanaian farmers have mostly been pleased with the weather as they head into the larger of two annual harvests, which runs to March. 

Ivory Coast’s regulator said output for the 2021-22 season may ease by 200,000 to 250,000 tons from a potential record of about 2.2 million tons a year earlier, Kone said Friday. Ghana expects to produce 950,000 tons, down from an estimated all-time high of 1.06 million tons.

Rabobank projects Ivory Coast’s production at almost 2.2 million tons, and 850,000 tons for Ghana.

“The outlook continues to be very good,” said Drew Lerner, president of World Weather Inc. in Overland Park, Kansas. “With La Nina coming back in the fourth quarter, we will probably see a continuation of mainly favorable conditions.”

Price Premium

While Ivory Coast’s regulator insists the $400 premium introduced a year ago won’t change from its current form, some analysts and traders say the mechanism remains unclear.

“The sum being referred to is an arbitrary sum and it’s disingenuous the way it’s referred to as a Living Income Differential, because there’s no specification as to what the farmer’s going to get at any one point,” said Jonathan Parkman, deputy head of agriculture at Marex in London.

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