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 came upon it in South America 500 years ago. Today, it remains a precious 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.

The four major West African cocoa producers are the Ivory Coast, Ghana, Nigeria and Cameroon, that together account for about two-thirds of world production. The Ivory Coast produces about 43 percent of the world's cocoa. The next largest producer is Ghana with about 14 percent of the world's output. Nigeria produces about 6 percent of the world's cocoa. 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 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 (ICE) 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 on the CSCE nearest-futures chart posted a new 20-year high of $2,420 per metric ton in early 2003 and then fell sharply early in the year, spending the latter half of the year consolidating in the range mainly between $1400-1800. However, that was still well above the all-time contract low of $674 posted as recently as December 2000. Cash cocoa in late 2000 hit lows not seen since the early 1970s. Prices were boosted in 2002 and early 2003 by tighter supplies and by unrest in the Ivory Coast. The cocoa market is very sensitive to developments in West Africa and particularly in the Ivory Coast where most of the world's cocoa is produced. Developments there that would in any way hinder the harvesting and movement of cocoa to the market are seen as very bullish and result in higher prices. Prices in early 2003 fell back as the cocoa market moved into a surplus situation in 2002/3 versus the deficit seen in 2001/2. Production was strong in West Africa as producers responded to high prices by maximizing output, thus putting downward pressure on prices.

Supply – The International Cocoa Organization (ICCO) estimates that global cocoa production in the 2002/3 (Oct/Sep) season was 3.102 million metric tons, up 8.4% from 2.861 million in 2001/2. Cocoa beans are processed or ground to produce the ingredients that are used in making chocolate and chocolate products. Those ingredients are mainly cocoa powder and cocoa butter. The trend among cocoa processors has been to grind beans to produce cocoa powder rather than butter because the demand for cocoa butter has been weaker since there are less expensive substitutes for making chocolate. World grindings are forecast in 2002/3 at 2.996 million metric tons, up 4.1% from 2.877 million in 2001/2. West Africa is expected to produce the most significant contribution to the rise in global output where production is forecast to increase by close to 9 percent (up 167,000 metric tons to 2.109 million metric tons), followed by the Americas (up 33,000 metric tons or 9 percent), while production in the Asia and Oceania regions is likely to remain the same.

End-of-season stocks are forecast in 2002/3 at 1.191 million metric tons, up 6.7% from 1.116 million in 2001/2. The ICCO forecasts that the cocoa market in 2002/3 was in a surplus state of 75,000 metric tons, which is a bearish factor and a switch from a 45,000 metric ton deficit in 2001/2.