Cocoa market looks forward to largest surplus in 6 years

Prices for cocoa beans on ICE EU and ICE US have continued to weaken and are currently down 10% from the start of the year, as the global market shifts from a deficit in the last season to the largest surplus in six years.

The initial forecast for global production in the current 2016/17 season is up 15% y-o-y at 4.55m tonnes, driven by an increase in the Ivory Coast. This is due to favourable weather conditions across major cocoa growing countries in West Africa that have helped crop development and mark a change from the previous season, when strong Harmattan winds combined with drought conditions related to El Nino lowered production. Meanwhile, cocoa production is also expected in increase in Ghana, Indonesia and Ecuador.

Global 2016/17 grindings, on the other hand, are expected to increase at a slower rate, up 3% y-o-y at 4.24m tonnes. However, this will be the first increase in grindings in two years because margins for cocoa bean processors have recovered from lows seen in previous years. Margins or the “combined cocoa ratio”, which measures the combined sales price for cocoa butter and powder relative to cocoa bean prices, is currently at 3.51, significantly higher than the lows of 2.65 seen in 2015.

Global bean production is projected to exceed demand by 264,000 tonnes this season. If realised, this would increase ending stocks to 1.67m tonnes, which is the equivalent to nearly 40% of global grindings.