The Cocoa Market

Basically currently the news is not good as the market is at 2 year highs, and you all would have seen
the recent reports in the press about increasing prices for chocolate. There are various factors that
contribute to market movements and only some of these have a direct impact, whilst the rest - as
with all tradable commodity markets, are susceptible to speculators and market operators who have
no interest in the actual physical commodity, but make their money through market volatility. Thus
they and their peers help stoke volatility through rumour and manipulation.
Not great for the end processor and user of chocolate and cocoa products, and the morals of trading
and speculating on food commodities are not for me to comment on!
Some basic facts: The Cocoa year starts on 1st October each year which is widely the time when the main
Cocoa Crop starts to be harvested around the world. Cocoa is grown either side of the
equator around the world and the largest production is West African, primarily from the
Ivory Coast and Ghana.
Generally world production is in balance with demand/consumption, however for the past
few years the trend has been that there has been a deficit, so with little or no carry over
stock, the cocoa supply situation is perceived as being fragile in terms of weather events or
reports of disease sending rumours of shortages whizzing around the traders and causing
price increases in the futures markets.
Cocoa is not grown on an industrial basis, harvesting has and will always be by manual
labour as will pruning and care of trees on plantations (Cocoa will not grow in full sun so
needs a canopy). So again - civil unrest - as in Ivory Coast a year or so ago, sent the traders in
a flurry for a while. Cocoa is primarily traded in London in Sterling and in New York - in US$
and the markets stay very parallel but with exchange rates also skewing apparent daily
movements.
The doom-sayers claim that cocoa will become a rare and expensive commodity by 2020,
again this is nonsense really, if cocoa prices for the farmer are high then they will invest to
increase yield from existing plantations and others will buy land and plant cocoa thus
increasing production to meet demand. A few years ago back in the early 80's, cocoa prices
were extremely high for a reasonably long period and so the Malaysian Government
encouraged massive cocoa planting, where cocoa was not that important previously.
However a few years later cocoa prices dropped and stayed low which resulted in them
ripping out the cocoa and planting with more profitable Palm for palm oil.
So now we are at the start of the new 2013/2014 Cocoa Year.
In essence, being early in the year we are seeing a lot of speculative activity and the fundamental
news is thin as yet, but by no means negative. Crop arrivals are up on last year so far, but this is just
a weekly barometer that gives indications to the crop size. The big guys, like Cargill, ADM and Barry
Callebaut employ pod counters in the main origins and these people travel around the plantations
looking at trees to collect data to then forecast yield - all this goes to the market and feeds the
rumour mongers - positive - negative all through the season.
The market has hit a 2 year high in the past few days, but this is not that spectacular when compared
to the Cocoa Butter situation where in 18 months we have gone from historic lows to the highs seen
in the graph below [note this was up to the beginning of October]

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To explain, Cocoa is harvested, fermented and dried and then shipped for processing. In all cases the
beans are roasted, shell removed and the beans are crushed or refined - then either: sugar and milk powder is added - again refined to reduce the solids to a very fine size that
cannot be detected on the tongue, conched (mixed over a period of hours) to develop
flavour and then deposited or moulded as chocolate. OR
the refined pure cocoa mass (or Cocoa Liquor) is physically pressed to expel the Cocoa
Butter from the mass. Cocoa Mass is roughly 45% dry solids and 55% Cocoa butter (or fat).
Typically the mass is pressed to result in a residual fat content in the Cocoa Powder to either
10-12% or 20-22%.
The resulting Cocoa Cake after pressing is then milled to powder and alkalised, to adjust PH and
colour to suit various applications and this is now Cocoa Powder. In terms of application, 10-12% is
generally used in Bakery applications and for making cheap Chocolate Flavoured Compound coatings
(like Scotbloc) and the 20-22 higher fat - which gives a better mouthfeel - in high end Hot Chocolate
drinks.
Cocoa Butter is a unique vegetable fat that melts at body temperature and is a creamy white colour
when set. It is widely used in cosmetics (lipstick, creams etc) and also to make white chocolate which is why white chocolate is not white. It is also used in Dark or Milk chocolate to adjust viscosity
to ensure chocolate couverture is easy to work with (enrobe, mould, dip, temper etc etc)
The term 'Cocoa Butter ratio' basically describes a see-saw effect which depends on good old
fashioned supply and demand. The producers need to balance their production as they cannot
produce just a single product - make one you make the other. So with the emerging markets craving

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western style products, Cocoa Powder demand shot up about 3-4 years ago as chocolate flavoured
baked items became widespread in India, China etc. This resulted in a surplus of Cocoa Butter. So to
place this surplus, prices dropped and due to higher demand, Cocoa Powder prices shot up. As
Western Chocolate producers saw these emerging markets as a great opportunity to increase
chocolate sales (mature markets in Europe are fairly stagnant - so little growth) they started getting
the new food manufacturers to trade up and use real chocolate instead of Cocoa Powders. These
players also have invested heavily in new Chocolate factories in the former Eastern Bloc and Far
East. An example of a step up is
1. chocolate flavoured biscuits
2. then chocolate chip/chunk biscuits
3. then chocolate covered biscuits.
Once tastes are developed for chocolate then the market can mature with Chocolate bars, pralines
and truffles etc.
So with this change in tastes happening and high CP prices being at more or less the same price as
real chocolate, demand dropped off - and fairly quickly!. Hence the see-saw effect and so again the
producers started getting lower returns for powder and so cut back production to try to level the
see- saw which then has put the supply/demand for Cocoa Butter back in balance. But the reduction
in demand for Cocoa Powder continued and so butter prices have been on a sustained upward curve
as per graph above.
In simple maths if Cocoa Mass costs say, 7/kilo and processing and margin adds 3/kilo, the
Cocoa pressers objective is to recoup an overall 10/kilo. So if they can only get 2.50/kilo for their
Cocoa Powder, then they 'need' to sell the Cocoa Butter at 7.50/kilo and vice versa. At any one
time, one side of the coin has greater demand than the other - they are hardly ever in balance hence
the see-saw effect.
The Cocoa Butter price has a major impact on chocolate prices, but there is a lag and so now we are
seeing very low powder prices - so consequently low ingredient input prices to make Compounds. As
a result we will see the larger Bakeries switching back into using Chocolate Flavoured compounds
instead of real chocolate and I am sure that will happen across the chocolate using world as the seesaw moves. At the end of the day it is the Supermarket price points that drive demand in the mass
market for bakery goods.
So where are we now?
We must not forget that all this is relative. Given the movements over the last 18 months, everyone
in the Industry is being affected in the same way, and as the old saying goes, 'it does not matter if
chocolate is 1 a kilo or 10 a kilo, so long as all competitors and the market in general is at the
same level at the same time'.

Tony Mycock 17.10.13