At the end of July, prices in London rallied above £2,700 for the first time since July 1977
Mintec's Tropical Research Services is monitoring market fundamentals, helping tropical commodities players anticipate changes in supply and demand.
The Q2 grind data shows the first signs of demand destruction caused by higher prices, with our estimate for grindings growth in 2022/23 reduced at the beginning of July following the release of Q2 grind data.
This represents a reduction of -39,000 tonnes which has a knock-on effect on 2023/24 and 2024/25 by reducing the base onto which our growth expectations are added.
However, while demand destruction is necessary, in our view this is still not sufficient to eliminate the looming structural deficit in 2023/24 and 2024/25.
Production forecast
It is becoming increasingly clear that an aging tree stock in Ghana and the debilitating long-term impact of Cocoa Swollen Shoot Virus (CSSV) in Ivory Coast have curbed production growth and may even be leading to a decline in trend production in both countries.
So, while weaker grindings growth in Q2 has a positive effect on the forward balance it is not nearly sufficient to eliminate the potential structural deficit we see developing in 2023/24 and 2024/25
Farmer prices
That said, we expect to see significant increases in the farmer price of cocoa in both of the main West African producing countries for the 2023/24, with higher prices likely to have a beneficial impact on levels of farm care, marginal harvesting at the tail of the main and mid-crops and fertilizer use.
In the past, West African farmers have also responded to higher prices by increasing production through new plantings of cocoa mainly in forest areas. New EU legislation on traceability and sustainability is trying to block this avenue to expansion.
Balance sheet
Therefore, it is by no means certain that current price levels are high enough to improve the forward balance sheet sufficiently to eliminate this structural deficit.
In our view, if the trend in production in Ghana and Ivory Coast proves to be in decline, much higher prices will be needed to bring about the sort of demand destruction necessary to balance the forward balance sheet.
Weather
With regard to the weather risk, very high sea surface temperatures off the coast of Ecuador are causing unseasonably heavy rains that are likely to have a negative impact on production in 2023/24.
However, the developing El Nino may not be as strong as the severe El Ninos of 1982/83, 1997/98 and 2014/15 that historically have caused the most weather damage in West Africa.'
This is an extract of the monthly cocoa report, published by Mintec's Tropical Research Services.
To explore the supply & demand dynamics, giving you competitive edge in cocoa markets, get in touch with our experts at info@tropicalresearchservices.com.
