Low grind demand could choke off cocoa rally

(Agrimoney) – The rally in cocoa prices could be under threat, with values already having reached the level needed to choke off demand, according to veteran analyst Judith Ganes-Chase, highlighted “low returns” for processors.

Eight month highs

New York cocoa futures reached eight-month highs in May – as markets absorbed downward adjustments to production in Ghana, the world’s second-largest producer – and they remain elevated, currently standing more than 5% above their 200-day moving average.

But Ms Ganes-Chase warns that the elevated prices may have already deterred demand, and so sown the seeds of a retreat in prices.

Demand “overstated”

“There is a possibility that with prices up, grind could be weaker than currently indicated by the International Cocoa Organization,” she said.

Demand expectations may be “overstated now that prices have lurched upwards again”.

Prices of cocoa products, butter and powder, compared with the buoyant values of raw beans suggested “low returns” for processors, she said.

The latest figures from International Cocoa Organisation (ICCO) see this season’s global grinding demand down 3.2% to 4.164m tonnes, a little below production, and down 43,000 tonnes from their last estimate.

Grinding, or cocoa processing, is a proxy for bean demand.

Balance “still not tight”

Ms Ganes-Chase added that the world cocoa supply and demand balance is “still not tight”, and not amidst the type of squeeze “that should continue to drive prices higher and higher”.

One of the reasons cited for the higher cocoa prices is a decline in harvest expectations for Ghana, the second-ranked producing country.

However, the grind in Ghana is expected to fall in 2014-15 too, by 34,000 tonnes to 200,000 tonnes according to the ICCO, a decline fuelled by lower cocoa bean availability.