Cote d'Ivoire cocoa payout rise 'lifts exposure to price tumble'

30.09.2016

Cote d'Ivoire cocoa output is poised to recover strong this year, raising the risk of the country becoming unstuck by its surprise decision to raise its guaranteed cocoa price paid to farmers.

The West African nation, the world's top cocoa grower, will harvest 1.75m tonnes of cocoa in 2016-17, which starts next month, returning output close to its high set two years ago, said Edward George, head of group research at Ecobank.

The performance would represent a sharp increase from the 1.51m tonnes produced in 2015-16, when output was hurt by weather setbacks, in the main blamed on an unusually fierce iteration of the dry Harmattan wind which blows south from the Sahara desert.

However, the prospect of a sharp rise in output, a forecast shared by many commentators, has only enhanced the surprise at this week's decision by Cote d'Ivoire's sector regulator, the Coffee and Cocoa Council (CCC), to raise its guaranteed price to farmers by 100 Central African francs (CFA) per kiogramme.

Most commentators had expected the payout to be kept at CFA1,000 per kilogramme, equivalent to about $1,710 per tonne.

'Increasing their potential for error'

The raised offer is equivalent to about 64% of the spot cocoa price, as measured by New York futures, compared with an average of 54% in 2014-15, and 44% last season.

"They are increasing their potential for error quite considerably," Dr George told Agrimoney.com.

"Are we going to see the same price growth in prices this year?" he said, if adding that the CCC would "probably be OK" in terms of avoiding losses on its cocoa purchases.

'Could prove hugely disruptive'

In fact, futures have continued to fall from June highs as ideas of 2016-17 crops in West Africa have improved, with New York's December contract finishing on Thursday at a six-month closing low of $2,728 a tonne.

While the International Cocoa Organization this week forecast a "balanced" world supply, in terms of production and demand, Commerzbank has flagged market talk of a global output surplus of 200,000 tonnes or more, reflecting ideas of a West African revival.

And the CCC could yet prove the architect of its own misfortune if it bungles the resale of some 200,000-250,000 tonnes in export contracts that have been returned to it by smaller Ivorian exporters caught out by the drop in prices.

"This could prove hugely disruptive to the market, potentially driving a price slump," Mr George said, although believing it most likely that CCC would achieve a gradual redistribution of the contracts, without much market impact.

The contracts in question - which small exporters are handing back after cocoa prices fell some 15% to CFA1,800 per kilogramme, meaning that the licences would be exercised at a loss – are spread over a period lasting until March.

'Not going to be happy'

A potentially more difficult issue for the market to deal with that of an unaccounted-for boost to supplies as low-quality beans withheld from the weather hit 2015-16 harvest are blended into the 2016-17 crop.

Rabobank earlier this week estimated that such a stockpile could amount to 100,000 tonnes, with Dr George seeing it potentially at 150,000 tonnes.

At the least "I do not think that traders are going to be happy about this, with 5-6% of beans going to be of bad quality," Dr George said.


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