Cocoa Update

The cocoa market has hit several 28-year highs recently that have been attributed to an influx of speculative traders. Because cocoa is a relatively small market, spec activity can have a big impact: the effect is well documented. A short overview of cocoa's fundamentals can also provide insight during this volatile time.

With midcrop harvest winding down, the 2007/08 cocoa crop is estimated at 3.74 million metric tons, according to the ICCO. This represents a recovery from last year's 3.37 million metric tons, and the industry hopes that next season's crop will be even larger. Analysts estimate the production deficit for 2007/08 will be about 5,000 tons, down considerably from estimates earlier in the season. However, another deficit year will decrease the stocks-to-use ratio, which fall to as low as 38 percent this season.

Cocoa production is ramping up in nontraditional locations such as Vietnam and India but not enough to radically change the supply scenario. Indonesia , currently the world's third largest producer, has recently announced that its production will be lower this season due to an outbreak of vascular-streak dieback disease. Cacao trees are vulnerable to a variety of diseases.

All indications point to continued growth in consumption, fueled by increased consumer demand for premium chocolate and demand growth in emerging markets. The expansion of the premium chocolate sector includes dark chocolate, which continues to enjoy good press regarding cocoa's health benefits. Dark chocolate uses 40 percent more cocoa-derived ingredients, which increases cocoa consumption in markets that are considered mature, such as the United States . What this means is that, while the percentage of the population that eats chocolate is not increasing drastically, they are eating more dark chocolate and therefore consuming more cocoa products than with milk chocolate.

In emerging markets, such as Asia , chocolate is not a traditional treat. Therefore, there is more room for growth as candy manufacturers work to introduce their products to consumers who are now earning enough to have some disposable income that could be spent on such luxuries. Helping to boost chocolate's popularity is the shift in this populous region to a younger demographic more interested in Western-style treats.

Growth in demand and stable production make cocoa a strong market. McKeany-Flavell hosts “ Cocoa 101” seminars to educate buyers and other interested parties in the cocoa market. Please contact us for details.

McKEANY-FLAVELL COMPANY, INC.