Production surplus could weigh down cocoa futures in Q2

The International Cocoa Organization (ICCO) secretariat in its latest issue of the Quarterly Bulletin of cocoa statistics, has forecast a production surplus of 102,000 tonnes in the 2020-21 season. West Africa, specifically Cote d’Ivoire and Ghana, account for nearly 60% of global output.

Production is projected to increase by 3% to 3.684 million tonnes from Africa. Cote d’Ivoire production forecasts for the 2020-21 season are rising to 2.25 million tonnes from a median forecast of approximately 2.20 million in the current season, while Ghana's crop is forecast at 905,000 tonnes, up from the current season's forecast of 875,000 tonnes.

The decision by the two West African countries to introduce a Living Income Differential (LID) effective in the 2020/21 season could weigh on cocoa futures in 2021, said commodities expert Winnie Muli, in an article on seekingalpha.com​.

Grinding forecasts

Despite a rise in global grinding forecasts for the 2020/21 season by 0.5% to 4.693 million tonnes compared to the 2019-20 season estimates of 4.669 million tonnes, low demand from the EU, higher production forecasts from the vital producers, and the LID introduced to be implemented in the 2020/21 season could weigh down cocoa futures.

Muli said cocoa futures have been performing poorly since the beginning of the year. Higher production forecasts globally and low demand from the EU due to rising COVID-19 cases are some of the factors that have led to the relatively low prices.

“The current rise in COVID-19 cases and sluggish vaccination rates will negatively impact cocoa bean usage during Q1 of 2021, thus impacting cocoa futures during Q2 of 2021. I believe during Q2 of 2021, cocoa futures will be bearish​.”

ICCO Market Report

In its latest Cocoa Market Report (February 2021), the ICCO said cocoa graded by the ICE Futures Europe since the start of the 2020/21 cocoa year reached 35,140 tonnes, down by 43% compared to 62,060 tonnes of cocoa graded over the same period of the previous season. Over the above-mentioned periods, the shares of Cameroonian and Ivorian cocoa beans at exchange gradings decreased from 68% to 59% and 17% to 13% respectively.

On the contrary, the share of Nigerian cocoa beans rose from 12% to 25%, while the gradings share of cocoa from other origins remained flat at 3%.

Over October 2020 – February 2021, the ICE Futures US graded 32,109 tonnes of cocoa beans, up from 9,279 tonnes graded during the same period of the preceding year. On a year-on-year basis, the share of cocoa beans from Cameroon and Ecuador in ICE Futures US gradings grew from 2% to 17% and from less than 1% to 14% respectively.

In contrast, the share of Ivorian cocoa beans at exchange gradings decreased from 75% to 55% while that of Peruvian cocoa moved from 8% to 7%. Additionally, the share of other origins in cocoa beans graded on the ICE Futures US declined from 14% to 7%.

The ICCO Expert Working Group on Stocks (EWGS) also issued a statement saying it now notes that a gap of 410,000 tonnes exists between the annual assessment of the estimated and identified cocoa bean stocks worldwide and the ICCO’s statistically-derived stocks figure.

“This is due to the existence of stocks held in non-reporting locations of which Asia is the most significant area. While the ICCO Secretariat maintains, so far, its supply surplus estimate of 10,000 tonnes for 2019/20 as published in its latest QBCS, it may revise that figure in its next Bulletin due at the end of May 2021, taking into account the outcome of this survey​.”