After moving to very low levels in late 2000, cocoa prices spent most of 2001 in a trading range. As 2002 got underway, prices began to move higher as it was expected there would be a world cocoa production deficit. In June 2002, cocoa futures prices began to move higher and from there prices staged a very strong rally reaching over $2,200 per metric tonne. It late 2000 prices were less than $800 per tonne. In addition to another year in which there would be a decline in world cocoa stocks, there were problems in the Ivory Coast. The cocoa market is very sensitive to developments in West Africa and particularly the Ivory Coast where most of the world's cocoa is produced. Any developments there that would in any way hinder the harvesting and movement of cocoa to the market are seen as very bullish and result in higher prices. In the past when there have been social or ethnic problems in the Ivory Coast, cocoa prices have reacted by staging strong rallies. Because of its position of being such a large cocoa producer and exporter relative to the rest of the world, developments in the Ivory Coast are usually the most important in the cocoa industry.

The largest production area for cocoa is West Africa where about 60 percent of the world's cocoa is grown. Cocoa is a tropical crop which is grown mostly in a zone that extends 15 degrees north and 15 degrees south of the equator. Cocoa trees reach maturity in 5-6 years but can live to be 50 years or more. During the course of a growing season, the cocoa tree will produce thousands of flowers but only a few will develop into cocoa pods. The typical production pattern is for a large main crop to be followed by a smaller mid crop. In West Africa, the main crop harvest starts in the September-October period and can extend into the January-March period. That is followed by the smaller mid crop harvest which is usually of lower quality than the main crop.

The four major West African cocoa producers are the Ivory Coast, Ghana, Nigeria and Cameroon. The Ivory Coast produces about 43 percent of the world's cocoa. The next largest producer is Ghana with about 14 percent of the world's output. Nigeria produces about 6 percent of the world's cocoa. Outside of West Africa, the major producers of cocoa are Indonesia, Brazil, Malaysia, Ecuador, and the Dominican Republic. Cocoa producers like Ghana and Indonesia have been making efforts to increase cocoa production while producers like Malaysia have been switching to other crops. Ghana has had an ongoing problem with black pod disease and with smuggling of the crop into neighboring Ivory Coast. Brazil was once one of the largest producers but has had problems with witches' broom disease.

The International Cocoa Organization (ICCO) reported in November 2002 that its estimate of the 2001/02 world cocoa crop was 2.818 million tonnes, a very slight 3,000 tonne increase from the 2000/01 world crop of 2.815 million tonnes. Cocoa beans are processed or ground to produce the ingredients that are used in making chocolate and chocolate products. Those ingredients are mainly cocoa powder and cocoa butter. The trend among cocoa processors has been to grind beans to produce cocoa powder. The demand for cocoa butter has not been as strong as there are less expensive substitutes for making chocolate. The result of this has been that cocoa butter stocks have built up which has made cocoa grinding less profitable. The ICCO estimated that the world cocoa grind in 2001/02 would be 2.85 million tonnes, a decline of 203,000 from the 2000/01 grind of 3.05 million tonnes. The decline in part reflects the buildup in stocks of products like cocoa butter.

The net result of the cocoa grind being larger than production is that there is a world production deficit of 60,000 tonnes. World cocoa stocks at the beginning of the 2002/03 season were 1.09 million tonnes, down 5 percent from the beginning of 2001/02. As the 2002/03 season got underway, it appeared the cocoa market could see another year of deficit. Production looked poised to increase while the cocoa grind could increase by a larger amount.

Cocoa prices moved sharply higher in late 2002. The decline in world cocoa stocks was one contributing factor. The other was an outbreak of problems in the Ivory Coast. A coup against the government threatened the stability of the country. In particular, it threatened the harvest and movement of the cocoa crop to export facilities. Ethnic violence also threatened cocoa workers which could result in a decline in production. In late 2002, the resolution of the situation was still not clear. This uncertainty in the world's largest cocoa producer was likely to increase price volatility.

Futures Markets

Cocoa futures and options are traded at the CSCE Division of the New York Board of Trade (NYBOT) and on the London International Financial Futures and Options Exchange (LIFFE).

Excerpted from the CRB Commodity Yearbook. For more information on CRB products click here

Related Links

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