Global Outlook: Cocoa production set for deficit
Without a doubt, 2019 was heavily influenced by the decision taken by Ivory Coast and Ghana to take control of its cocoa prices.
In 2020, we will see the full impact of the new pricing mechanism in the lead up to its implementation in October.
One of the early concerns with the initiative was over-production as farmers will have a better incentive to grow more cocoa. Following this, Ivory Coast announced a production cap at 2 million tonnes for the 2020/21 season. Ghana also alluded to a cap, leading the market to somewhat breathe a sigh of relief.
However, leaving aside market skepticism over whether a cap can actually be enforced, another issue still lies with the 2 million-tonne figure. This would have an opposite effect to over-production and shift the market into a serious deficit in 2020/21.
Recent data by the ICCO already indicates that the 2018/2019 season flipped from a surplus to a 21,000-tonne global cocoa deficit. Sister title IEG Vantage currently points to a deficit of 84,000 tonnes for the current 2019/20 season, up from by 55,000 tonnes from its previous estimate. Overall, global cocoa production for 2019/20 is placed at 4.878 mln tonnes.
Vantage’s 2019/20 production figure for Ivory Coast is pegged to remain stable at 2.22 mln tonnes; therefore, a production cap at 2 mln tonnes for 2020/21 and with grindings continuing to rise, the world may end up with a 300,000-tonne deficit as a result. Last season saw the world’s top grower produce 13% more cocoa year-on-year; a record production figure attributed mainly to favourable weather conditions for the main crop and output from thousands of small plantations that have developed and are now in the producing stage. During the beginning months of this new season, heavy rains that had negatively affected crop development recently and caused black pod disease to spread in some growing areas in the country were reported to have eased. However, some beans are still likely to be rejected by exporters due to the high moisture content.
Meanwhile for second producer Ghana, its 2019/20 cocoa output is placed at 820,000 tonnes by Vantage. This is more or less in line with 2018/19’s 815,000 tonnes, which itself was a considerable drop (9%) and a key component behind driving global supplies into a deficit. The outbreak of Cocoa Swollen Shoot Virus (CSSVD) disease and unfavourable weather conditions during the year had a devasting impact on the country’s cocoa production. In order to combat against CSSVD the Cocobod had to replant an estimated 400,000 hectares of cocoa plants which are anticipated to start producing within three to five years. In addition, recent favourable weather conditions partnered with the adoption of good sowing operations are supporting the development of the current main crop for this coming season.
Elsewhere in Africa, Nigeria’s production in 2019/20 is anticipated to rise to 260,000 tonnes, while Cameroon’s is estimated to top 290,000 tonnes. Nigeria’s cocoa production during last season faced deteriorating weather conditions including persistent heavy rains that also led to the spread of diseases and inadequate sunshine to dry beans. With the 2019/20 season now underway, beneficial weather conditions reflect optimism for better production levels leading to a 4% annual increase. Cameroon’s production rise (3.6%) for next season is backed by government programs and improved quality of beans which are increasing local prices.
Brazil was another contributor to 2018/19’s deficit, as volumes slipped by 13.7%. The reduction in output depicted the extent of the damage to production due to intense heat and lack of
rainfall during the season especially for the major producing region, Bahia State. However, the 2019/20 season is likely to see its cocoa production rise slightly to 180,000 tonnes, a 2.3% year-on-year increase, according to Vantage. Nevertheless, the start of the 2019/20 season is witnessing weak arrivals as witches’ broom disease is still affecting cocoa pods.
In Ecuador, steady growth in production continued in the 2018/19 season as volumes grew by 9% backed by increased plantings and harvests of CCN-51 variety. However, the 2019/20 season will see growth slow as cocoa production is set to only rise by 3.2% to 325,000 tonnes, according to Vantage figures. Ecuador, the third largest global cocoa producer, was also vocally displeased with the new cocoa pricing mechanism being instilled by Ivory Coast and Ghana, deeming it was “unfair and a mistake”.
In Asia, cocoa production continues to lessen as grinding volumes are on the rise with growing demand. Production in Indonesia is placed at 230,000 tonnes in 2019/20, a 4.4% rise on the previous season, which saw volumes dip by 8%. Meanwhile, Malaysian output is expected to remain stable at 3,000 tonnes, Vantage indicated. Cocoa production in these countries has been a major issue with cocoa trees that have exceeded their productive life, ageing farmers and diseases. However, to feed local industries with cocoa beans, governments within the region continue to undertake production boosting initiatives with a view to softening the contraction in production may soften in subsequent seasons.
Price volatility and sustainability
Price volatility has risen considerably since June 2019 and will probably continue until there is a clearer indication once the LID has been finalised and how it will all be implemented.
Over the last 6 months, the announcement of the new pricing mechanism has driven spot prices higher in the short-term while the industry has to take this additional cost element into account. Peaks and troughs include cocoa futures sinking to USD2,143/tonne in August 2019 and USD2,761/tonne in November 2019. At the time of writing, the price rally appears to be reversing as traders try to reduce futures prices to compensate for higher spot prices. Although there is still 10 months to go till LID is fully implemented, the market is already experiencing great instability due to rising uncertainty, which is likely to continue in 2020.
Chocolate producers will also eventually pass additional costs onto consumers (at least partially). Barry Callebaut announced this in November indicating it will raise prices to compensate for the additional premium with others likely to follow suit. Overall chocolate prices might be affected this festive season and into 2020. Sugar and cocoa butter prices, the two main chocolate ingredients, have advanced substantially this season and these factors are likely going to increase retail prices. Fundamentals are also starting to look bullish for both sugar and cocoa butter in 2020 and chocolate-makers may start preparing to increase prices in advance.
Sustainability will also continue to be a key element in the cocoa sector and having recently even become a bargaining chip. Having sensed that the LID was not being well received initially by the industry, Ivory Coast and Ghana sent out warnings to the market in order for them to take the initiative seriously. In September 2019 both threatened to halt chocolate/cocoa companies’ sustainable programmes until they accepted LID. Eventually this so-called ban was lifted, and stakeholders have declared to be behind the programme with companies such as Olam, Mars, Barry Callebaut and other members of the world cocoa foundation (WCF) lending their support.
However, it is important to point out how important these sustainability programmes are, how widespread they have become across the industry and what a crucial part they play in their brand. From Mondelez’s Cocoa Life to Mar’s Cocoa for Generations, everyone has seemingly jumped on the bandwagon. And whether it is somewhat commercially driven more than an environmental/socially-conscious act, it does feel like a movement is occurring in order to address the irregularities in the sector.
While the Ivory Coast and Ghana insist that LID is part and parcel of any company’s own sustainability plans, others do not believe that these should go hand in hand. Though the plight of African cocoa farmers is fully understood, many believe this might not be the right mechanism to raise local incomes. Some would rather recommend that local governments educate farmers on how to raise the quality of beans instead. Both countries do however, truly believe that this initiative would help to create a sustainable market: i.e. reduce child labour and stop deforestation. And although some studies suggest that higher farmers’ income would cut child labour, deforestation on the other could become an even more acute issue as farmers could potentially move into protected areas to raise production.
All in all, 2020 is unlikely to be a quiet one for the cocoa sector. While we won’t really know what exactly is going to happen till LID is approved and becomes a law come January, it is clear that there has been a market shift this year, with Africa clearly taking the reins. They know very well that they control the sector in terms of volumes and now prices it seems, leaving the rest of the world with no choice but to follow. The LID has been and will continue to be controversial topic come 2020 and beyond.
This article appeared in our Global Outlook 2020 supplement, published in late December 2019. For a free download of the whole supplement, click here.