22 C O M M O D I T Y M A R K E T S U P D A T E

cocoa market Update By Alice Birnbaum, Assistant Vice President

Cocoa bean prices reached a 10-month peak of $2,724 per metric ton in September 2012, amid supply concerns in the Ivory Coast, the worlds largest cocoa exporter. The concerns stemmed from the Ivorian governments major reform of its cocoa marketing system in early 2012. As part of the reform, the government sold forward over half of its estimated 2012/2013 cocoa crop via auctions. Market concerns over farmers suc-cessful delivery under fixed-price, auction-related contracts in a rising price environment caused bean prices to soar 34.3% over the nine months ended 9/7/2012.

Starting in November 2012, prices began to slide as the International Cocoa Organization (ICCO) released revised pro-jections of world cocoa production and grindings (a term that refers to the initial step of producing cocoa liquor, and is thus used to approximate consumption) for crop year 2011/2012. The new estimates project a net surplus of 90,000 metric tons after initial estimates called for a net deficit of 19,000 metric tons. As a result, the ratio of cocoa stocks to grindings increased to 47.5%, versus the prior projection of 44.5%.

The revised projections were influenced by Ghana (producer of approximately 30-40% of global cocoa supply) aggressively selling its latest crop into a market in which cocoa processors were already sufficiently covered. Compounded by the unfore-seen success of the Ivory Coast auctions, prices declined by 18.1% over the five months ended 2/8/2013.

According to Reuters, a key factor in the success of the Ivorian auctions was the announcement of the farm gate price (the minimum price guaranteed by the government) of $1.41 per kilogram ($1,410 per metric ton), a 9.0% increase over the 2011/2012 average farmers sale price and thus generally well received by producers.

Meanwhile, after a steady three-year decline which ended in late 2011, cocoa butter a key derivative product of cocoa beans used to manufacture chocolate began a dramatic rebound in the second half of 2012. Cocoa butter prices nearly doubled from $2,396 per metric ton at 6/22/2012 to $4,454 per metric ton at 2/1/2013. With bean prices up only 5.3% over that period, the butter/bean ratio (the multiple at which cocoa butter trades to the LIFFE or ICE cocoa bean contracts) nearly doubled from 1.14x at 6/22/2012 to 2.02x at 2/1/2013. This marked the first time the ratio exceeded 2.0x since January 2010.

The rebound in the butter/bean ratio was largely driven by a reduction in supply of semi-finished cocoa products (liquor, but-ter, and cake) as grindings decreased year-on-year in the second quarter of 2012 by 9.8% in the U.S. and by 18.0% in Europe. Processors reduced grindings leading up to that period, as press-ing margins fell below breakeven rates for many producers due to excess global processing capacity and weakened demand in Europe and North America.

The global cocoa market is currently awaiting official estimates from the ICCO for the 2012/2013 harvest season, which con-cludes in March 2013; preliminary projections in the market call for a deficit of over 100,000 metric tons, which could support bean prices in the coming year.

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40.0%

45.0%

50.0%

55.0%

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1,000

1,500

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Cocoa Bean Fundamentals...Gross Crop (right) Grindings (right) Stocks/Grindings (left)

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... Supporting Butter/Bean BounceCocoa Bean Price (left) Butter/Bean Ratio (right)

Source: Bloomberg, BBH AnalysisSource: Bloomberg, ICCO, BBH Analysis

Second Quarter 2013 23

Cocoa Production Process

Waste Water and Shells

Powder Chocolate Butter

Source: Bloomberg, BBH Analysis

Cocoa Beans

Roasted Nib

Mass or Liquor

Cocoa Butter

Cleaning

Shelling

Roasting

Winnowing

Grinding

Refining

Milling

Sieving

Mixing

Grinding

Conching

PressingPressing

Cocoa Cake

+ Sugar & Milk

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