Cocoa Seen Climbing by Olam for Fourth Year Amid Shortage

(Bloomberg) – Cocoa prices will probably advance for a fourth consecutive year in 2015, driven by a global shortage, according to Olam International Ltd. (OLAM)

Demand will exceed supply by 120,000 metric tons in the season started Oct. 1 because of lower output in West Africa, the world’s biggest growing region, Gerard Manley, global head of cocoa at Olam, said in an interview. That follows a balanced market the previous year, he said. The company agreed this week to buy Archer-Daniels-Midland Co. (ADM)’s cocoa business for $1.3 billion to become a top-three processor of beans.

Futures in London climbed to the highest in 42 months in September, extending last year’s 21 percent rally as growing consumption in Asia fueled speculation supply would not match demand. There are also now signs that supplies from Ivory Coast, the largest producer, may trail those a year earlier. Port deliveries were down 12 percent by Dec. 14, according to estimates by KnowledgeCharts, a unit of Commodities Risk Analysis in Bethlehem, Pennsylvania.

“The arrivals in Western Africa are tracking as we imagined: they are substantially lower than last year,” said Manley, who has spent three decades in the cocoa industry. “For next year, we’re friendly to prices. We expect them to rise. The increase will occur gradually given that we expect a deficit of good-quality cocoa,” he said in Singapore Dec. 16.

While prices have increased 12 percent this year in London, they have dropped 11 percent from 2,187 pounds ($3,417) a ton on Sept. 25 after concerns eased that the Ebola virus would disrupt shipments from West Africa. Futures traded at 1,944 pounds on ICE Futures Europe today.

Global Deficit

Sucres et Denrees SA, a Paris-based trading company, expects a deficit of 80,000 tons this season, it said in October, while Ecom Agroindustrial Corp. of Switzerland forecast a 50,000-ton surplus this month because of a bigger main crop in Ivory Coast and slow grindings in Europe and Asia. The world market had a 53,000-ton surplus in 2013-2014, the International Cocoa Organization estimates.

The London-based group plans to reduce its forecast for a shortage of about 100,000 tons in the season started on Oct. 1 to reflect the output potential of several countries, including Ivory Coast, it said last month.

Global consumption of cocoa powder used in ice creams, cereals and beverages will rise to 1.895 million tons in 2024-2025 from 1.315 million tons this year, according to Olam. Demand for cocoa butter, a product that accounts for as much as 20 percent of the weight of a chocolate bar, will grow 48 percent to 1.79 million tons in the period, it estimates.

Prices will have to rise to a range of 2,200 pounds to 2,400 pounds in order to boost production constrained now partly by land scarcity and low yields, Manley said.

Growth Story

“The growth story” is still in Asia, said Manley, who previously worked at Holco Trading Co., now part of ED&F Man Holdings Ltd. An additional 920,000 tons of processing capacity will be needed by 2020 to meet global demand for chocolate and cocoa-based products, a 16 percent increase from now, and a further 850,000 tons will be required by 2025, according to Olam. That’s based on a 3 percent compound average rate of growth in annual consumption.

As part of the deal with ADM, Olam will add 600,000 tons of processing capacity from Brazil to Singapore to the 100,000 tons it already owns, and pick up the deZaan and UNICAO brands, the company said on Dec. 16.

Growers need to increase yields through fertilizers and other good agricultural practices, Manley said. “Where we have programs in Africa, we are already seeing the potential to double those yields. This is what we’ve got to do as an industry to ensure we don’t have a deficit,” he said.