Cocoa Outlook 2021: Time for a Choco-late Bull Run?

Over the past twelve months, many agri commodity prices have risen substantially, with the S&P GSCI Agriculture Index up almost 60% YOY. Cocoa, however, appears to have been left out of the bull run, with prices in New York only up 7% YOY and flat in London. The curve for both contracts also moved from steep backwardation to contango, suggesting a change in sentiment. So why has cocoa been left out and could it be due to its own late bull run?


- Production risks in West Africa with the potential for drier than normal weather in the months ahead.
- We reduce our previous global S&D estimates lower on the back of weather risk and strong demand: 2020/21 is now seen with a surplus of 123,000mt and 2021/22 with a deficit of -8,000mt.
- High consumer confidence in Asia may be driving demand growth in the region with plenty of space for a further recovery in the US and Europe.

A Shifting Production Outlook

The unseasonably good weather in West Africa that boosted 2020/21 production may not continue ahead of the 2021/22 season. Recent rainfall across Ghana, in parts of Côte d’Ivore and elsewhere in West Africa has been below average, increasing stress on trees and reducing soil moisture levels in cocoa regions, this is due to the Africa Intertropical Front being well below its mean position. Furthermore, long range IRI forecasts suggest a higher probability of lower-than-normal rainfall continuing over the coming months and with a neutral ENSO outlook we may see inadequate soil moisture levels as we enter a more normal dry season toward the end of the year. The less than ideal weather and outlook has led us to reduce our global production estimates for 2021/22 by 60,000mt to 4,940tmt.
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Cocoa Demand Gaining Ground

Recent cocoa grinding figures for the three main reporting regions were positive for Q1 2021 on a aggregated level and in our opinion still have the capacity for further growth. Asia region performed the best with the highest Q1 grinding figure on record and a 3.1% increase on last year. Overall grinding figures for the three regions were only down by 0.3% YOY but continue to show a strong recovery from Covid-19 lows.

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Looking ahead to next quarter we expect to see continued good demand in Asia and conservatively estimate grinding figures to at least return to 2019 levels. North America and Europe should see a continued recovery backed up by strong retail sales with levels improving substantially year-on-year but remaining marginally below 2019. Overall we expect aggregate cocoa grinding to increase around 8.5% YOY, the largest quarterly increase since 2010. For the 2020/21 season we increase our estimate of global cocoa demand growth to 2.2% YOY from 1.6%. We believe that much of the growth in retail will remain strong into 2022 and that coupled with continued improving consumer confidence and improving out-of-home consumption should lead to solid demand growth for cocoa. In 2021/22 we expect cocoa demand to grow by 3% YOY up from our previous estimate of 2.2%.
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Balancing on a Tight Rope

The current supply and demand balance suggests a large surplus in the market. This is backed up by increasing US merchant stocks which are the highest since 2018 and declining differentials at origin suggesting very good availability. Since December, reports suggest European differentials have declined as much as 60% for Nigeria and Cameroon and around 50% in the Côte d’Ivore and 30% in Ghana. In addition to the decline in differentials, futures prices also fell around 7.5% on average. Furthermore, the Counsel de Cacao recently reduced the farm gate price in Côte d’Ivore by 25% for the mid-crop. The decline in Côte d’Ivore also suggests a greater flexibility on price than previously expected. The current supply situation is bearish and coupled with uncertainty from Covid-19 and the living income differential (LID) has resulted in reduced futures market participation from both speculators and commercials and reduced forward cover. ICE NY cocoa open interest in futures and options is at around the lowest level in six years and forward sales for the 2021/22 crop in Côte d’Ivore and Ghana are reported to be lagging 2020/21 substantially.

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Looking ahead, strong consumption growth and less than ideal weather in West Africa ahead of the 2021/22 main crop could cause the 2021/22 balance to turn negative. The potential for this appears underpriced in our opinion with demand likely continuing to steadily rise over the next 6 months and possibly over the next 12 months. Much of the increase in retail demand seen over the pandemic will likely be sticky despite the easing of lockdowns and increasing out-of-home consumption. The net effect from this and better consumer sentiment will likely be an overall demand boost that could be present in the market for some time. The greatest risks for price increases appear in Europe where stocks have not increased in the same way they have in the US due to the present futures arbitrage. We’ve have change our outlook for 2021/22 from a surplus of around 60,000mt to a deficit of 8,000mt, a much tighter market than previously thought, on potentially higher than expected demand and lower production.
20210428 Table 1

A Preference for Powder

Powder prices have remained robust over the last year, compared to beans and butter, and will likely continue as demand growth remains strong post pandemic. Strong emerging market imports will likely keep prices elevated as powder demand appears to be more resilient. This trend was emerging pre-pandemic and will likely see post pandemic tailwinds. The continued strength in powder demand and prices should cause an improvement in processor margins to pre-pandemic levels, but this might take a bit of time, as out of home consumption and sales of beauty products in the US and Europe are make a slow recovery.

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In our opinion risks are skewed to the upside with global demand likely to continue to recover and increase while production for 2021/22 remains unclear with the potential for lower output than initially expected. Speculators also have the potential to build a sizeable long position in the coming months which could catch out short sellers and industry participants that aren’t hedged. Despite the recent shift in the shape of the futures curve, it may be that this is not maintained in the coming months as the July and September contracts come forward, the curve may shift back toward an inversion if the weather worsens. Those in possession of stocks in Europe may stand to benefit as the lower availability of stocks in the region compared to the US presents a greater risk of volatility and price spikes.