The recent activity of Armajaro, the trading firm that has purchased stocks adding 240,100 tons constituting up to to 7% of global annual production have shaken the market with prices being pushed upwards beyond $2,800 per ton. That is a trader gain, it does nothing much to help farmers.

Armajaro has long warned of production problems in the Ivory Coast and has bet successfully on rising prices during previous rallies. Intelligence, it seems, is the most precious commodity. Beyond short-term squeezes, as the Dukes discovered, it is still largely about supply and demand. Armajaro has now released its position so it would appear to us that the strategy was a short term speculation on prices and being able to influence them.

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Cocoa Facts & Figures

• Number of cocoa farmers, worldwide: 5-6 million
• Number of people who depend upon cocoa for their livelihood, worldwide: 40-50 million
• Annual cocoa production, worldwide:4 million tons
• Annual increase in demand for cocoa: 3 percent per year, for the past 100 years
• Current global market value of annual cocoa crop: $5.1 billion
• Cocoa growing regions: Africa, Asia, Central America, South America (all within 20 degrees of the equator)
• Percentage of cocoa that comes from West Africa: 70 percent
• Length of time required for a cocoa tree to produce its first beans (pods): five years
• Duration of peak growing period for the average cocoa tree: 10 years

It is ambitious to develop a page on cocoa beans because there are effective commodity associations, bodies and major trading interests. However, nothing ventured, nothing gained, so we will develop this page and hope to provide food for thought.

Having experienced relatively slow growth for much of the 1960s and 70s, cocoa production has been increasing at a faster rate since. From just over one million tons per annum in 1961, production rose to 1.5 million tons by 1981 but by 2007 had risen to 4 million tons. It is an impressive growth in production and in consumption. The latter is due to increased popularity of chocolate specially in USA but also in Europe. India and China are also consuming more but started from low per caput levels. There ia a great deal of further growth likely in the two markets.

The leading four producers have had a very impressive growth rate since the 1960s. Most of them were very minor producers, especially Indonesia until 1985. I remember helping allocating a lot of land to cocoa for Repelita IV on a Mission for FAO Investment Centre on the basis of strong forecasts for demand which fortunately have proven correct. Out of the four, Indonesia started last and from the lowest point.

Even more impressive is the fact that consumption grew so fast that the increased production took place at the same time as the price increase. The rate of income per ha was impressive from the beginning and compares very favourably with that of oil palm and is above the latter today.

African countries accountfor 77% of world exports,they areby far the largest supplier of cocoa to the world markets, followed by Asia and Oceania (17%) and the Americas (seven per cent). 'The cocoa market remains highly concentrated , with the top five countries accounting for almost 90% of world net exports whilst over 98% originated from the top ten countries during the five year period from 2001/02 to 2005/06. Cte dIvoire is the worlds leading exporter of cocoa, representing 45% of global net exports, followed by Ghana and Indonesia (18% and 15% respectively). With increased processing at origin, cocoa products now represent a slightly higher proportion of total cocoa exports in most cocoa producing countries.'(ICCO). Roughly 3 million tons are exported as beans, half a million ground and half a million as butter.

Some of the main cocoa producing countries remain heavily dependent on cocoa export earnings.Higher market prices during 2001-2003 led to increased cocoa export earnings. Consequently, shares of cocoa earnings surged in main cocoa producing countries, Cte dIvoire and Ghana, from 27% and 20% respectively in 2000 to 43% and 39% respectively in 2003. The decline in international prices experienced in 2004 and 2005 led to lower cocoa export earnings in many cocoa producing countries, as in Cte dIvoire, where the share fell to 30% in 2005. Cocoa became the first source of exports earnings (US$ 1.071 billion) in Ghana in 2004, surpassing gold (US$ 840 million). This degree of dependence on export earnings from cocoa is the sort of dependence that EU-ACP Action plan is trying to diminish, particularly because cocoa prices are very volatile.

According to ICCO, cocoa is mainly consumed as chocolate confectionery, chocolate coated products (biscuits, ice creams), or in other food products containing cocoa powder including beverages, cakes, snacks, etc. The principal ingredients in chocolate are cocoa paste, which imparts the basic chocolate flavour, cocoa butter which provides the characteristic mouth feel, sugar and a flavouring agent. Milk or milk powder is added to produce milk chocolate; nuts, biscuits and other fillings are added to make filled chocolates. Cocoa powder is used in a wide range of food products and beverages. The growth in cocoa consumption in the Far East and Eastern Europe is largely attributed to an increase in demand for products containing cocoa powder. Relatively small amounts of cocoa butter are used in cosmetic products and, more recently, new products are being manufactured from cocoa by-products in some cocoa producing countries.

Processing continues to be done in importing countries near centres of consumption in Europe and North America; the Netherlands and the United States have maintained their positions as the worlds two leading cocoa processing countries. Germany became the third largest cocoa grinding country towards the end of the review period, realizing very rapid increases in processing during recent years.

Prices (red line above)in 1982 were slightly above $2,000 ton and in 2007 stood at around $1,800 while production rose over the same period from 1.6 million to 4 million tons (blue line above).Prices have risen again to above 2,500. The burning issue of the day is what happens next. Before the collapse in the speculative commodity price hike in 2008, IOCC published forecasts through to 2012. These forecasts

Reference Scenario

Forecasts

Projections

2007/2008

2008/2009

2009/2010

2010/2011

2011/2012

2012/2013

SUPPLY AND DEMAND

World production, 000 tonnes

3,713

3,915

4,076

4,193

4,324

4,459

World grindings, 000 tonnes

3,727

3,805

3,900

4,024

4,154

4,285

WORLD COCOA STOCKS

End-of-season stock levels

1,536

1,607

1,742

1,869

1,995

2,125

Surplus/Deficit

-51

71

135

126

127

129

Stocks-to-grindings ratio (%)

41%

42%

45%

46%

48%

50%

COCOA PRICES

SDR/tonnes (2006/2007)

1,374

1,446

1,414

1,343

1,297

1,257

World production Value (millions SDRs in 2006/2007)

5,101

5,662

5,763

5,632

5,607

5,605

The forecastwas for a modest 10% increase in production and in prices but we live in times where forecasts are difficult. . Given past trends, the forecast is entirely resaonable and is a change over the previous ones. However, we are in the midst of a depression which may advsersely impact on cocoa consumption. In particular, there may be a short term impact during 2009 and to a lesser extent 2010 that would bring developments closer to the original forecasts. We would not actually be surprised if prices were to fall in the face of mounting stocks due to falling consumption in the main markets.

In the longer term, increased consumption in India and China is very likely. In established markets, chocolate may actually benefit from adverse publicity on the includion of sugar in congectionery and formulations will tend to favour higher cocoa content.

If our reservationsprove true, IOCC should revise their forecasts and investors be vary of expectations made during the hike last year.

Nevertheless, cocoa at $1,200 per ha still looks like a good investment for farmers provided they avoid farming systems that are too high input which makes them risky. Having said that, we are aware that CDC achieved high yield rates in Irian Jaya, Indonesia with a high input approach. The average tield rate for low or normal inputs is around 0.76 tons per ha. There were reports of CDC being able to achieve up to 3 tons per ha.

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The chart above traces price development by the month in 2009 and 2010. The bull market has thus far been reigning supreme and Armajaro still setting the pace at roughly twice normal trend. The same is the case for many commodities and there are new indications that prices may be in for a fall.

Cocoa beans - Monthly Price - Commodity Prices Month Value May-10 3,165.75 Jun-10 3,230.83 Jul-10 3,229.55 Aug-10 3,071.71 Sep-10 2,874.98 Oct-10 2,909.66 index mundi