Cocoa Shortage Seen by Olam as Beans a ‘Poor Man’s Crop’

(Bloomberg) – Cocoa is heading for a third consecutive shortage, the longest stretch in almost 50 years, according to Olam International Ltd., which supplies about 10 percent of the world’s production of the beans.

The shortage will help push prices at least 10 percent higher from now until the end of 2014, Gerard Manley, Olam’s managing director, said in an interview in Amsterdam yesterday. Output will lag behind demand by 100,000 metric tons in the current season, he estimated, or about 2.4 percent of production. He wouldn’t specify the shortfall for 2014-15.

Prices in London have already climbed 13 percent this year as shortages persisted led by growing worldwide demand for chocolate. A third consecutive shortfall would be the longest streak in 47 years, according to data from the International Cocoa Organization in London.

“Cocoa prices need to go higher to stimulate production as demand will keep rising,” Manley said. “The price to the farmer can be a real problem because they have to compete with other crops. It has been a poor man’s crop.”

Demand for cocoa powder, used in cookies and ice cream, will expand in Asia in the next 10 years to contribute more than 75 percent of incremental growth in total consumption, according to Manley. Usage of cocoa butter, needed to make chocolate, has grown 7 percent in the past 10 years in emerging markets, led by Asia, he said.

March 2011

Cocoa for September delivery closed yesterday at 1,948 pounds ($3,264) a ton on NYSE Liffe in London. A 10 percent increase would put prices at 2,143 pounds, the highest since March 2011.

“We see continued development of real chocolate products along with powder-based products as incomes of the middle classes rise in China, Indonesia and India,” Manley said. Olam supplies about 500,000 tons of cocoa a year, and is the largest originator of beans from Indonesia, he said.

What farmers get paid is key to stimulate production. To compete with other crops, more coordinated action is needed on the part of the industry, in collaboration with national governments to improve yields, he said.

Olam is among 12 cocoa and chocolate companies that signed an agreement with the Ivorian government last month to provide improved planting materials, fertilizers and training to farmers in Ivory Coast and Ghana.

The price of chocolate is almost double the price paid to farmers, and the farmers’ beans represent only 3 percent of the value of a chocolate bar, according to Jean-Marc Anga, executive director of the International Cocoa Organization.

Farmer Income

Farmer income in Ivory Coast and Ghana must be at least 60 percent of the international price. This season, Ivorian farmers got paid a fixed price of 750 CFA francs ($2.05) per kilogram.

“We hope to get more than 1,000 CFA francs next season,” Jacques Kouakou, chairman of a cooperative of more than 3,000 Ivorian farmers, said in an interview in Amsterdam yesterday. Farmers also want an increase in a rebate that is redistributed to farmers by the cooperative to cover costs. They want it to increase to 125 CFA francs from 80 CFA francs, he said.

“Our vehicles are getting old, there are no roads, and we need to buy fertilizers and pay workers,” said Kouakou, who grows cocoa on 25 hectares.

Producer prices near 1,000 CFA francs a kilogram in 2009-10 helped boost production to a record 4.3 million tons in 2010-11 as farmers were able to improve yield by spending more to nurse their plantations.

Global output this season will be 4.16 million tons, the International Cocoa Organization estimates. Ivory Coast will account for a record 1.6 million tons, according to a person familiar with the government’s estimate.

“We have had two to three years of very good weather which has significantly supported the higher production numbers in Africa,” Manley said.