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- CRB Fundamentals - 2008 Commodity Articles

Cocoa

Cocoa is the common name for a powder derived from the fruit seeds of the cacao tree. The Spanish called cocoa "the food of the gods" when they found it in South America 500 years ago. Today, it remains a valued commodity. Dating back to the time of the Aztecs, cocoa was mainly used as a beverage. The processing of the cacao seeds, also known as cocoa beans, begins when the harvested fruit is fermented or cured into a pulpy state for three to nine days. The cocoa beans are then dried in the sun and cleaned in special machines before they are roasted to bring out the chocolate flavor. After roasting, they are put into a crushing machine and ground into cocoa powder. Cocoa has a high food value because it contains as much as 20 percent protein, 40 percent carbohydrate, and 40 percent fat. It is also mildly stimulating because of the presence of theobromine, an alkaloid that is closely related to caffeine. Roughly two-thirds of cocoa bean production is used to make chocolate and one-third to make cocoa powder.

Four major West African cocoa producers, the Ivory Coast, Ghana, Nigeria and Cameroon, together account for about two-thirds of world cocoa production. Outside of West Africa, the major producers of cocoa are Indonesia, Brazil, Malaysia, Ecuador, and the Dominican Republic. Cocoa producers like Ghana and Indonesia have been making efforts to increase cocoa production while producers like Malaysia have been switching to other crops. Ghana has had an ongoing problem with black pod disease and with smuggling of the crop into neighboring Ivory Coast. Brazil was once one of the largest producers of cocoa but has had problems with witches' broom disease. In West Africa, the main crop harvest starts in the September-October period and can be extended into the January-March period. Cocoa trees reach maturity in 5-6 years but can live to be 50 years old or more. During the course of a growing season, the cocoa tree will produce thousands of flowers but only a few will develop into cocoa pods.

Cocoa futures and options are traded at the CSCE Division of the New York Board of Trade (NYBOT) and on the London International Financial Futures and Options Exchange (LIFFE). The futures contracts call for the delivery of 10 metric tons of cocoa and the contract is priced in US dollars per metric ton.

Prices - Cocoa prices in 2007 on the nearest-futures chart moved higher early in the year and then traded sideways until the fourth quarter when they moved up to 4-3/4 year highs, just below the more-than-two decade high of $2,420 posted in early 2003. Cocoa futures closed 2007 at $2,035 per metric ton, up +24.5% from the close of $1635 in 2006. Bullish factors for cocoa in 2007 included (1) a higher global cocoa deficit as demand in 2007 exceeded supply by 299,000 metric tons, (2) weather concerns as drought in early 2007 slowed cocoa bean growth and too much rain near the end of the growing season caused an outbreak of black pod disease (a fungal disease due to excessive moisture), (3) labor unrest in the Ivory Coast where ongoing strikes slowed cocoa exports, and (4) a surge in commodity fund buying due to the weak dollar as funds bought commodities as an inflation hedge. The Ivory Coast is the world's largest cocoa producer with 40% of world production.

Supply - The world net cocoa crop in 2005-06 (latest data available) fell -2.8% yr/yr to 3.190 million metric tons, down farther from the record high of 3.492 million metric tons seen in 2003-04. The drop in production caused closing stocks in 2005-06 to fall -15.3% yr/yr to 1.227 million metric tons, and the stocks/consumption ratio to fall to a low level of 36%. World grindings in 2005-06 rose by +2.7% yr/yr to 3.411 million metric tons, which was a new record high. The world's largest cocoa producer by far is the Ivory Coast where production in 2005-06 fell 6.1% yr/yr to 1.195 million metric tons from the record high of 1.386 million metric tons in 2003-04. The Ivory Coast accounted for 37% of world cocoa production in 2005-06. Other major cocoa producers included Ghana with 20% of world production, Indonesia with 14%, Cameroon with 5%, Brazil with 5%, and Nigeria with 5.0%.

Demand - World consumption of cocoa in 2004-05 (latest data available) rose +2.8% yr/yr to a new record high of 3.321 million metric tons. The world's largest cocoa consumers are the European Union with 40% of world consumption in 2004-05, followed by the U.S. with 12% of world consumption. U.S. consumption of cocoa in 2004-05 rose by +2.0% to 409,000 metric tons. There were large consumption increases in 2004-05 in Malaysia (+14%), in Russia (+8%), and in the European Union (+6%). There were large consumption decreases in Turkey (-18%), in Canada (-10%) and in Japan ( 7%).

Trade - U.S. imports of cocoa and cocoa products in 2007(annualized through October) fell by 9.6% yr/yr to 1.337 million metric tons, down from the record high of 1.317 million metric tons in 2005.




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