World may see ‘slight’ cocoa surplus

(Agrimoney) -Barry Callebaut sided with investors forecasting a surplus in world cocoa output this season after all, but unveiled a further slowdown in its own volume growth, against a backdrop of a “challenging” cocoa powder market.

The chocolate giant, which processes 23% of world cocoa production, highlighted the impact of rains in supporting surprisingly strong output of the bean in West Africa, the world’s top producing region, during the current April-to-September mid-crop harvest.

“A good start to the mid-crop cocoa harvest… could turn an expected deficit for the 2013-14 season into a slight surplus,” Swiss-based Barry Callebaut said, stoking a longstanding market debate.

Rival crusher Olam International, for instance, has forecast a 100,000-tonne deficit in 2013-14, which ends in September, while the International Cocoa Organization in May forecast a 75,000-tonne deficit, only to signal last month a revision to a 30,000-tonne surplus.

Funds sell, trade buys

The debate has stalled a rally in cocoa futures in London at just under £2,000 a tonne, although this still represents the highest level in three years.

Barry Callebaut said that ideas of a surplus meant that “funds consequently sold a significant share of their net long position” in cocoa derivatives, but “some industry buying promptly supported prices”.

There is still a widespread expectation that world cocoa output in 2014-15 will fall short of demand.

The higher price has contributed to pressure on the so-called “combined ratio” –the value of cocoa powder and butter, the main processing products, compared with the price of raw beans.

The combined ratio has been “softer than expected”, falling to 3.0, down from levels above 3.5 in the autumn.

‘Market remains challenging’

The weaker combined ratio, well below average levels over the past decade, reflects in particular a weak market for cocoa powder, used in making the likes of chocolate biscuits and ice cream, rather than cocoa butter attributed with giving chocolate bars melt-in-the-mouth qualities.

The cocoa powder ratio has fallen below 0.6 for the first time in at least 12 years, while cocoa butter ratios are at a historically high 2.6.

“The cocoa powder market remains challenging,” said Juergen Steinemann, the Barry Callebaut chief executive.

Some attribute the markets’ divergence to the revived fortunes of Western economies, in which chocolate bars are particularly popular, compared with those in Asia, the top region for powder consumption.

Margins vs volumes

The group said that the market conditions had contributed to a slowdown in growth in sales volumes to 2.4%, excluding acquisitions, in the September-to-May period, the first nine months of its financial year.

Barry Callebaut, which has a mid-term target of 6-8% volume growth per year, reported a rise of 3.1% in sales in the September-to-February half.

“As we continued to focus on increasing product margins, we concentrated on selective growth in developed markets,” Mr Steinemann said.

In Europe, while sales volumes rose by only 0.2% to 553,291 tonnes during the nine months, by value they rose 10.0% to SFr1.92bn.

Group sales came in at SFr4.31bn for the nine months, up 22%, accelerated by the acquisition of Petra Foods’ cocoa business, excluding which revenues rose by 6.8%.

Barry Callebaut shares stood 2.5% lower at SFr1,198 in lunchtime deals.