Enza Tedesco
E aster is a boom time for chocolate consumption, and this year fans of gooey bunnies and candy eggs got a break. The holiday coincided with a fall in the price of chocolate's main raw material -- cocoa -- to near a 28-year low. The lower prices weren't a surprise. In the past two years, declines have appeared as inevitable as the melting of a Mounds bar in the August sun. The villains: ample production, large stocks and a lack of buying by chocolate makers.
But many analysts think these beans could bounce soon. To support their expectations, they cite higher consumption and reduced selling pressure on producers.
The July cocoa contract on the Coffee, Sugar & Cocoa Exchange in New York hit a high of $834 a metric ton in the past week, up from its April 28 low of $771.
First-quarter figures on grindings -- the amount of cocoa beans processed for retail products such as chocolate -- showed that consumers have a growing taste for sweets. Grindings in the U.S. were up 12.3% from the level in the first quarter of 1999. Grindings in Germany rose 8.1%, and those in the Netherlands climbed 6.8%. These three countries are the largest processors of cocoa.
Chocolate Fix?
With the world's top cocoa producer, Ivory Coast, having already sold its record 1999-2000 crop of 1.33 million metric tons, another source of pressure on prices has been removed.
"We're entering a period of the year where seasonally you start to get more convincing rallies in the market," says Luis Rangel, an analyst with Fimat USA in New York. "That's a function of fewer and fewer origins [producers] selling, particularly from West Africa."
But analysts say the amount of buying by chocolate manufacturers will determine the durability of any upturn. They're the major purchasers, but the persistent downtrend in prices has allowed them to avoid storing cocoa at their facilities. Instead, they've been buying hand-to-mouth, while cocoa has been piling up in exchange warehouses.
"Manufacturers hold the key to the rally," says James Cordier, president of the Liberty Trading Group in St. Petersburg, Florida. "They have very little inventory around because the market has been falling gradually for almost three years now."
As of May 11, CSCE cocoa warehouse stocks totaled 5.317 million 145-pound bags, compared with 3.856 million a year earlier.
Although producers may now be out of the market as sellers, chocolate manufacturers may also be largely absent as buyers because of a change in their purchasing policies, owing to the liberalization of Ivory Coast's marketing system.
"Ivory Coast, which used to be a forward seller in the market, is a spot seller these days," notes Fimat's Rangel. The chocolate makers want to lock in prices when there is greatest liquidity in the market, which is also when producers are selling, he adds.
John Long, a spokesman for Hershey Foods in Pennsylvania, observes that "in general, the industry has shifted to buying during the harvest period," as a result of the privatization of Ivory Coast's coffee and cocoa export regulatory body.
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When that took place, "that meant that the entire cocoa crop would be marketed at harvest time, so the industry anticipated that this would create tremendous price pressure at harvest time and everyone held back to buy that," Long says.
Overall, market analysts think the market's fundamentals are looking more bullish. Although they don't see prices revisiting the record highs of the 1970s, around $5,000 a ton, some see the possibility of $1,000-$1,100 later this year.
C rude oil reached $30 a barrel Friday for the first time since late March, on worries over low inventories and OPEC officials' statements that they won't raise output again when they meet next month. New York Mercantile Exchange futures rose about $3 during the week.
C otton gained more than 6% last week on concerns that hot and dry conditions that are depleting soil moisture in key U.S. growing regions might reduce next season's crop. The leading July contract hit a three-week high of 62.47 cents a pound Thursday.
Enza Tedesco is a reporter with the Dow Jones Newswires.
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Is cocoa finally ready to rally?