Cocoa Processing Drops 5.9% in Asia as Higher Prices Curb Demand

(Bloomberg) – Cocoa processing in Asia fell in the third quarter as futures soared to the highest level in more than three years, damping profits for grinders.

The grind, an indication of demand, declined 5.9 percent to 151,643 metric tons in the three months ended Sept. 30 from 161,097 tons a year earlier, the Singapore-based Cocoa Association of Asia said in an e-mailed statement today. The data are for Malaysia and members in Singapore and Indonesia. The number, which includes grinds from two more factories, was down 6.3 percent from the previous quarter. Beans are processed into butter and powder to make chocolate.

Cocoa surged 14 percent this year in New York partly on concern that the Ebola outbreak in West Africa may spread to Ivory Coast, the top producer, and on signs of rising demand for chocolate in Asia and North America. Asian consumption is eroding inventories as a percentage of demand to the lowest since 2010, the International Cocoa Organization estimates.

“This grind data in Asia is if you like a blip,” Edward George, head of research at Lome, Togo-based Ecobank Group, said by phone today. “It’s a response of grinders to very high prices. Ultimately, maybe they feel confident with the stocks that they’ve got that they can wait a bit for prices to go down and start grinding again. It doesn’t necessarily reflect an actual drop in demand.”

Malaysian Grindings

The contract for delivery in December fell 1.1 percent to $3,079 a ton on ICE Futures U.S. today. The price reached $3,399 on Sept. 25, the highest level for the most-active contract since March 2011. Prices posted a sixth straight monthly gain in September, the longest streak in 12 years.

Cocoa grindings in Malaysia dropped 14 percent to 61,428 tons in the third quarter, the cocoa board said on Oct. 21. Bean processing in Europe, which accounts for about 40 percent of global grindings, declined 1.1 percent to 327,866 tons in the third quarter from a year earlier, European Cocoa Association data showed on Oct. 14. North American grinding climbed 4.6 percent to 138,027 tons in the July-September period, the National Confectioners Association said Oct. 16.

“Total grindings globally were slightly down year-on-year in the third quarter but it looks like for the full cocoa year they are about 2.7 percent up,” Jonathan Parkman, co-head of agriculture at Marex Spectron Group in London, said by phone. “That is slightly disappointing. What we have seen is very strong grind at the start of the season and weak numbers at the end. That tells us global demand is slowing, which is logical given that prices have risen substantially.”

Fast Growth

The International Cocoa Organization on Aug. 29 forecast a world surplus of 40,000 tons this season after previously predicting a deficit of 75,000 tons. While world production is projected to top demand in the season that ends this month, bean grindings, a measure of consumption, will climb for a fifth straight year to a record 4.26 million tons, it estimates.

While demand in the Asian region was ranked as the world’s lowest per capita in 2013, the market will grow at almost twice the global rate over the next four years, according to researcher Euromonitor International Ltd. Asian demand expanded 4.5 percent last year, the fastest rate in the world and almost six times the global increase of 0.8 percent.

“The Asian region is a special case,” Parkman said. “Total cocoa grinding capacity is far greater than current demand from that region. Processing capacity in Asia as a whole is significantly in excess of 800,000 on an annual basis. The margins for processors in Asia are still under pressure.”