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COCOA MARKET INTELLIGENCE - Q1 2023

2022/23 FIRST QUARTER GRINDINGS: GLOBAL PULLBACK, INCREASE AT ORIGIN

Grindings data published by the main regional cocoa associations for the first quarter of the 2022/23 cocoa season indicated that cocoa processing activities decreased in the main cocoa-consuming regions namely Europe, South-East Asia, and North America. The slowdown in cocoa processing activities could have been partly fuelled by high operation costs amidst a strong global inflationary context and persistently higher energy costs.

 

 

As presented in Figure 1, the European Cocoa Association (ECA) posted data indicating a year-on-year decline of 1.7% from 365,826 tonnes to 359,577 tonnes in grindings. In turn, the Cocoa Association of Asia (CAA) posted a slight year-on-year drop of 0.2% from 231,309 tonnes to 230,806 tonnes.

In a similar vein, the National Confectioners’ Association (NCA) published a reduction of 8.1% from 116,614 tonnes to 107,130 tonnes of cocoa beans ground. Grindings for each first quarter of the previous three cocoa years represented approximately one-fourth of the respective total volumes of cocoa ground at the time.

Furthermore, the declining grindings during Q4 2022 moved in tandem with the net imports of cocoa beans and cocoa semi-finished products in the European Union whereas in the United States and Canada, net imports of cocoa beans and cocoa semi-finished products were higher year-on-year. Indeed, the latest trade statistics from Eurostat indicate that imports of cocoa beans and cocoa semi-finished products in the European Union were reduced by 13.1% year-on-year in Q4 2022 to 336,000 tonnes. On the contrary, the combined volumes of net imports of cocoa beans and cocoa semi-finished products of Canada and the United States increased by 10% from 180,000 tonnes in Q4 2021 to 198,000 tonnes in Q4 2022 based on trade statistics from the Global Trade Atlas (GTA).

Hence, the decline in processing activities in the United States was accompanied by an increase in the net imports of cocoa beans and cocoa semi-finished products while in the European Union, the descending trend in both grindings and net imports of cocoa beans and cocoa semi-finished products during Q4 2022 suggests a plausible shrinkage in the demand for cocoa in the whole EuroZone.

With consumers in developed countries becoming more discerning and cocoa imports in that part of the world on course to start complying with upcoming laws regarding sustainability, deforestation, child labour, traceability, etc., imports of beans for the operations of cocoa processors are likely to focus more on certain qualities other than the import volumes.

 

FUTURES PRICE MOVEMENTS

During January 2023, prices of the nearby cocoa futures contract oscillated between US$2,448 and US$2,523 per tonne in London and averaged US$2,488 per tonne, up by 7% compared to the average price of US$2,324 per tonne for the nearby contract recorded at the same period of the 2021/22 cocoa year. In New York, the average price of the MAR-23 contract settled at US$2,614 per tonne, up by 3% from US$2,547 per tonne recorded in January 2022 and ranged between US$2,564 and US$2,689 per tonne.

Figure 2 shows price movements of the first and second positions on the London and New York futures markets respectively at the London closing time in January 2023, while Figure 3 presents similar information for the previous year.

Figure 3 shows that the London market developed in backwardation while the New York market evolved in contango during January 2023. Indeed, the MAR-23 contract was priced with an average premium of US$50 per tonne compared to the MAY-23 contract in London.

 

The backwardation in the London market is probably fuelled by the new rules governing cocoa gradings in ICE futures Europe which came into effect in December 2022. The higher re-grading fees together with the price discount applied to exchange-certified stocks with older grading dates are incentivizing on the one hand the grading of new stocks and, on the other hand, the withdrawal of beans with older grading dates. Clearly, this turnover process has just started; and the backwardation will remain until a new stable equilibrium in the turnovers of stocks is
reached. On the contrary, the New York futures market was in contango. The new grading rules concern only the London market.

Thereafter, upon the release of slightly lower year-on-year grindings data published by the main regional cocoa associations in Europe, South-East Asia, and North America, prices of the front-month cocoa contract plunged by 3% on both markets over three consecutive trading days 17-19 January, tumbling from US$2,520 to US$2,452 per tonne in London and from US$2,641 to US$2,564 per tonne in New York.

However, the reduction recorded in prices of the MAR-23 contract was short-lived and in the course of the latter part of January 2023, prices generally reverted from their descent. In London, prices of the nearby cocoa futures contract increased by 2% moving from US$2,448 to US$2,495 per tonne while in New York, they averaged US$2,601 per tonne and ranged between US$2,570 and US$2,627 per tonne. This market development occurred in the midst of looming concerns of potential crop problems in Ghana due to the negative effect of the Cocoa Swollen Shoot Virus Disease (CSSVD) on the country’s cocoa production.

Source: www.icco.org