The changes to quality regulations for Ivorian cocoa will very likely have minimal impact on supply over the short term, although with other reforms could lead to less volatility in cocoa prices in the coming quarters, as pre-selling will allow for more consistent fertiliser application. The improved quality also will be beneficial to grinders such as Barry Callebaut. Although there have been reports of slow deliveries in recent weeks, we believe the Ivorian cocoa harvest will remain generally steady on a year-on-year basis, and we continue to forecast lower average prices in 2013.
Local reports suggest that some commercial traders in Côte d'Ivoire have noticed an improvement in the quality of cocoa beans as part of the country's continuing reforms. New quality reforms limit the amount of moisture in the beans, requiring them to be dried longer at the farm. In particular, humidity levels have dropped to less than 10%, down from 14% during the 2011/12 season. The change in humidity levels is part of a broader series of reforms aimed at creating sustainable cocoa production growth. A key feature includes selling 70-80% of the beans at the start of the season (a common feature within agricultural commodity markets) and a floor price for farmers at roughly 60% of the value of spot cocoa prices.
|Front-Month LIFFE Cocoa, GBP/tonne (daily chart)|
The change in quality on its own will have a relatively minimal effect, although the production process could slow if rains occur and beans are kept on farms longer in order to ensure proper drying. It would also help to reduce the perceived quality differences between Côte d'Ivoire's and Ghana's cocoa beans (Ghana's being considered of higher quality). More broadly, the larger reform package aims to help to reduce volatility in cocoa production from Côte d'Ivoire, particularly since pre-selling the beans could enable farmers to systematise their fertiliser application, which could reduce output volatility. Although there have been some delays in getting cocoa to ports in recent weeks on the back of the new drying regulations, we continue to forecast lower average cocoa prices in 2013 and anticipate supply from Cote d'Ivoire remaining relatively strong by year-on-year standards.
|Still In An Uptrend|
|Barry Callebaut - Share Price (CHF)|
For companies such as Barry Callebaut, the improvement in quality and supply is likely to help to improve margins, since the company's profitability is vulnerable to cocoa price fluctuation. Buying cocoa for its processing plants is its main cost, and the company can only pass on a portion of these increases to the company's clients. Better supply also is likely to mitigate some of the concerns over weak demand growth, particularly in Europe.
|Notes: f BMI forecasts. Sources: 1 International Cocoa Organisation.|
|Cocoa Production, '000 tonnes 1||1,350.0||f||1,365.0||f||1,394.8||f||1,408.8||f||1,415.8||f||1,422.9||f|
|Cocoa Consumption, '000 tonnes 1||12.4||f||13.0||f||13.8||f||14.3||f||14.8||f||15.0||f|