Potential for Bumper Crop Keeps Pressure on Cocoa

(Wall Street Journal) – When it comes to cocoa, investors are seeing too much of a good thing.

Prices for the main ingredient in chocolate have fallen 7.7% this month as investors encountered a familiar scenario: the prospect of a bumper crop in Ivory Coast, the world’s top cocoa grower.

The nation produced a record 1.7 million metric tons of cocoa in the year ended September, according to the International Cocoa Organization in London. Market watchers say Ivory Coast cocoa output is on track to be about the same this year, at a time when the world is consuming less chocolate.

“Reports indicate a good mid-crop coming on, which should keep selling pressure on,” said Jack Scoville, vice president of Price Futures Group in Chicago.

Ivory Coast produces two cocoa crops a year—a main harvest that begins in October and a smaller “mid-crop” that is reaped starting in April.

Higher wages for cocoa farmers in Ivory Coast and wet weather are increasing bean production, while demand for chocolate has been less than some investors had expected.

Global demand, as measured by the amount of cocoa processed, is likely to decline this year in every region except Africa, the ICCO said. Demand in Europe, the biggest chocolate-consuming region, and the Americas are expected to fall 2% each, while consumption in Asia, once seen as the region with the most growth potential, could fall 4%, according to the ICCO’s forecasts.

“Asia is pulling back, everyone is pulling back from cocoa because the price got really high and chocolate is a luxury, not a need,” said Shawn Hackett, president of Hackett Financial Advisors, a brokerage and consultancy in South Florida.

The most actively traded cocoa contract on the ICE Futures U.S. exchange fell for 12 straight sessions, the longest losing streak ever, according to FactSet data going back 30 years. It recovered on Friday as the contract for May delivery rose 2.8% to $2,790 a ton.

Money managers are pulling back on their bets on higher prices. As of March 17, bullish hedge funds, pension funds and others outnumbered those betting on lower prices by 34,539 contracts, the smallest gap since July 2013, according to data from the U.S. Commodity Futures Trading Commission.

That said, the prospect that by 2020 there could be a global cocoa shortage is still on some investors’ minds. With about 70% of global cocoa production in West Africa, the crop is vulnerable to plant diseases or civil strife. In addition, many of the trees there are older and less-productive.

There are a number of potential threats to cocoa production over the next five years, but the market has baked a lot of that risk in, said Hector Galvan, senior market strategist at RJO Futures in Chicago. “You can only beat a dead horse for so long before you come up empty.”

Also, while demand has declined, it doesn’t stay down for long, Mr. Galvan said. The world’s craving for chocolate always bounces back.