Cocoa price surge signals bitter news
By Javier Blas and Jenny Wiggins in London
Published: September 21 2009 18:36 | Last updated: September 21 2009 18:36
Cocoa prices hit a 24-year high on Monday amid forecasts that consumption will outpace production in the crop year starting next month, raising fears that the cocoa market is entering its worst period of shortages in 40 years.

The price surge – likely to boost chocolate prices – comes at a sensitive time for UK-based Cadbury, which is trying to prove its viability as a stand-alone confectionery company after rejecting an unsolicited takeover offer from the US food group Kraft.

Kraft claims it will be able to manage high cocoa costs more easily than Cadbury because it is a bigger company, with $42bn in annual sales compared with Cadbury’s £5.4bn.

Kraft’s cocoa costs are estimated at 1.5 per cent of its total sales while Cadbury’s are estimated at 10 per cent, according to Morgan Stanley.

“Any particular commodity price change is less marked for Kraft,” the US food group said on Monday.

Nonetheless, traders said Kraft had hedged less of its cocoa needs than Cadbury, making the US food company more vulnerable to a short-term rise in prices.

Both companies decline to discuss hedging policies.

Andrew Bonfield, Cadbury chief financial officer, said last week at an investor conference that, if cocoa prices stayed at current levels, “there will be no choice but to increase the price of chocolate in certain markets around the world”.

The bullish market has its root in Ivory Coast, which delivers 40 per cent of the world’s cocoa.

After a poor harvest this season, traders fear that the country’s ageing trees will deliver an even smaller crop in 2009-10, in spite of favourable weather. Traders also said the El Niño weather phenomenon could hit supplies from Indonesia, the world’s third-largest producer, and Ecuador, the seventh-largest.

Meanwhile, cocoa demand is set to recover, growing between 1.5 and 3 per cent in 2009-10 after falling 6 per cent this season, creating a market deficit for the fourth season in a row, the most prolonged since the 1965-1969 shortages period.

“Chocoholics will be disappointed to hear that the long-run cocoa bull run remains intact,” said Luke Chandler, head of agribusiness research at Rabobank in London.

This bullish sentiment has filtered beyond the usual operators, bringing speculative investors to what is usually a dull market handled by merchant and trading houses.

In London, the benchmark second front-month price on Monday rose to an intra-day high of £2,055 ($3,334) a tonne, the highest since early 1985.

Traders worry that falling output in Ivory Coast will leave a lasting market deficit. Ivorian small farmers – among the world’s most heavily taxed growers – have neither money nor in centives to buy fertiliser or replant to increase output.

Cocoa buyers such as Nestlé are so worried that they have launched programmes to replant trees in a desperate effort to avoid a long-term decline in output.

Ivory Coast production “could fall by more than 100,000 tonnes in 2010 after a fall of about 200,000 tonnes in 2008-09”, the French embassy in the country warned this month.

Copyright The Financial Times Limited 2009