Reform Presents Upside Risks To Output

BMI View: We see upside risks to our forecast for cocoa production in Nigeria in the medium term given the government's creation of a cocoa regulatory authority in charge of organising the industry into co-operatives. That said, we believe the government's view that the reform and increased support to farmers will help to double cocoa production in the coming years is overly optimistic. Reforms could also boost consumption, with a new target to grind 25% of output domestically. These developments will be only moderately bearish for prices in the medium term.

We see upside risks to our medium-term forecast for cocoa production in Nigeria, as the government has decided to step up its efforts to restructure the cocoa industry and boost support to the sector. The government has announced it will set up a cocoa regulatory authority that is run by the private sector and in charge of organising the industry into cooperatives. The Cocoa Corporation of Nigeria would register growers, who would then be kept up to date on current prices and helped to improve their bargaining power over exporters. This, combined with increased support to the industry, could boost production out to 2016/17. The government also recently indicated it is distributing 4mn cocoa pods for free to farmers that, once planted, will grow seedlings that eventually develop into trees with higher yields.

Pedestrian Growth
Nigeria - Cocoa Production & Consumption ('000 tonnes)

We currently forecast cocoa production to grow 18.7% over our forecast period, reaching 273,000 tonnes by 2016/17. We believe the government's expectation to double cocoa production in the next couple of years on the back of the creation of the Cocoa Corporation of Nigeria and recent support programmes is overly optimistic, but we acknowledge that recent reforms could push us to revise up our production forecast out to 2016/17. Indeed, an increase in output to 350,000-400,000 tonnes by the end of our forecast period would be significant. This would push the country to be the fourth largest cocoa producer in the world, far above Brazil and Cameroon and just below Indonesia.

We believe current reforms also could lead us to revise up our consumption forecasts over the medium term, as the country is investing in capacity in order to domestically process about 25.0% of the cocoa produced. This would help Nigeria to move up the value chain and increase revenues from its cocoa product exporting industry. The country currently consumes about 10.0% of its cocoa output in local factories, so the move could more than double consumption over the coming years.

Looking Strong
Front-Month LIFFE Cocoa (GBP/tonne, weekly) & RSI (below)

These developments are only moderately bearish for prices in the medium term, as Nigeria is a relatively small producer compared with Côte d'Ivoire or Ghana. We believe only comprehensive reforms in these countries, focusing on replanting programmes, ageing farmers and inefficient intermediaries, will prevent prices from trading to the upside in the coming years. We forecast cocoa prices to average GBP1,750/tonne by 2017.

Nigeria Cocoa Production & Consumption, 2012-2017
2012e 2013f 2014f 2015f 2016f 2017f
Notes: e BMI estimates. f BMI forecasts. Sources: 1 International Cocoa Organisation.
Cocoa Production, '000 tonnes 1 230.0 210.0 240.0 250.0 260.0 273.0
Cocoa Consumption, '000 tonnes 1 19.2 20.4 21.7 23.2 24.8 26.4
This article is tagged to:
Sector: Agribusiness
Geography: Nigeria

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