Cocoa Market Outlook Conference 2015 Report and Presentations
The ICCO used the traditional meeting week in September to launch its first-ever one-day Conference, inviting not only Member delegates but also paying members of the trade and industry to an intense investigation of the current market and trends for the upcoming cocoa year.
The Cocoa Market Outlook Conference gathered speakers from around the world to share their opinions and expertise, and the gathering was most appreciated by an engaged audience of well over 200.
Welcoming the audience, ICCO Executive Director Dr. Jean-Marc Anga commented on the challenges faced by the cocoa market, including the threats of the El Niño weather phenomenon, the possible spread of pests and diseases and the need to secure an adequate supply in the long term. This is balanced against the a steady increase in chocolate consumers who have become more demanding, he said, both in traditional markets and in emerging ones.
Before introducing the first of 15 presenters, Conference Chair Ms. Judith Ganes-Chaseof J. Ganes Consulting opened the event by saying that she hoped that the Conference would show where cocoa really fit into the global market.
Global Supply and Demand Prospects and Threats
Taking an overview of the current market was the ICCO’s Director of Economics and Statistics, Mr. Laurent Pipitone, whose review of ‘What to expect in the coming years’ began by showing the tight relationship between grindings and production over the past 50 years, and the development of cocoa prices related to availability. Dependence on African production was becoming increasingly marked, he said, while both Latin American and Asian levels had stagnated for the last decade. Mr. Pipitone went on to identify the main factors, in business environment, agronomy and economy that influence cocoa production and farm profitability.
On the demand side, Mr. Pipitone pointed to an ICCO forecast or 4.131 million tonnes for the 2013/14 season, and showed how Asian and African grindings had soared in the past few years to equal those of America, and, just this year, to make Côte d’Ivoire the world’s largest grinding nation, overtaking the Netherlands.
In terms of apparent cocoa consumption, he showed that only Africa and the Asia & Oceania region were growing, according to ICCO statistics, with a huge 51% increase in Asia from 2008/09 to 2013/14, and sizeable growth as well in Africa and Latin America. Emerging markets at 28% growth, were clearly leaving the mature markets behind, as the latter could only muster a 7% over the period.
Projecting the confectionery consumption and cocoa consumption statistics in the much-discussed Chinese and Indian markets, Mr. Pipitone gave an increase of 7.9% for the two markets combined in the five years from 2013/14 to 2018/19, while the world’s confectionery consumption was estimated to rise by only 2% over the same period, and only 2.2% in cocoa consumption.
In general, he concluded, cocoa production and consumption would continue to be quite tightly balanced over the next five years, but with a small but significant production deficit shown, according to the results of using the ICCO’s econometric model.
In his presentation, Mr. Euan Mann of Complete Commodity Solutions noted the huge recent response to the recent threat to cocoa supply, and added that that the resulting increased price level in some ways “solves” the supply situation, because better paid farmers were now able to afford improved inputs.
The current market was paying the right price incentive, he said, and the current uptrend seen in West Africa was one result. However, although he called the current Ghana crop–with its much commented-on downturn—an “anomaly”, he also pointed to elements that could still lead to significant supply deficits, including a West African main crop that appears to be below trend, and an Ecuador crop that is at risk from a strong El Niño weather pattern.
All this comes against a background of weakness on the demand side, with grinds down, driven by weak chocolate sales, he said. Based on the current situation, he projected a 125,000-tonne deficit in supply on the cocoa market for the 2015/16 season.
Reviewing the challenges for the world’s second largest producer, Dr. Francis K Oppong of the Ghana Cocoa Board highlighted ageing tree stock, along with pests and diseases (which he said made fully 40% of trees less than fully productive), and the issues of low productivity and ageing farmers, as well as an upturn in illegal gold mining activities.
Countering this situation, he explained, were Cocoa Board programmes to rehabilitate cocoa farms, including a greatly increased supply of seedlings, more efficient pest and disease control regimes and improved soil fertility thanks to the distribution of free fertilisers to farmers. Also part of the strategy were more support for extension work, under a public private partnership platform, a programme emphasising the importance of youth in cocoa, and enhanced support for research at the Cocoa Research Institute of Ghana, where work on a black pod-resistant strain was progressing. To conclude, Dr. Oppong showed the audience a brief video covering some of the farm rehabilitation work now under way in Ghana.
Dr. Edward George of Ecobank predicted weakening production in Côte d’Ivoire for the current 2015/16 year, after the record 2014/15 results, although this would not be severe, he said. Ghana, meanwhile, would rebound from its unexplained slump, although there was still the risk of a weaker rebound or a further slump.
Calling price “the best fertiliser”, he noted Côte d’Ivoire’s improved producer prices and good prospects for growth, while Nigeria and Cameroon struggle to keep up output. Although output growth is stagnant there, potential for production growth exists in both those countries, he added.
Meanwhile, although the current El Niño is likely to be a strong one, the impact of these weather anomalies appears to be waning, and has been followed in the past by dramatic crop growth. Nevertheless, he said, the disruptive weather pattern was likely to be “the joker in the pack” of factors influencing the current cocoa year.
On the demand side, Dr. George noted the fact that Côte d’Ivoire was now the largest grinding country, but wondered whether processing there would grow, faced as it was by commercial viability questions resulting from the removal of subsidies and increased taxation for the local industry.
Key risks to watch out for in 2015/16, according to Dr. George, were the effects of El Niño, the issue of Ivorian output growing out of control, black pod and swollen shoot diseases, labour shortages and the upcoming Ivorian presidential election.
Moving the focus to the Latin American producers, Mr. Douglas Hawkins of Hardman & Co, who speculated on whether the cocoa origins in this region could regain their global production leadership. Compared to the other growing regions, he said, Latin America led in sustainable growth of both harvested area and yields.
While there is a lot at stake, with a $117 billion chocolate market depending on the cocoa producers, he said, several of the major buyers of cocoa have pledged to be sourcing their requirements sustainably by 2020, which gave an advantage to the Latin American producers. Being the only region with significant plantations, in terms of size, and a nucleus of the commercial plantation sector gave it another boost, he added. Meanwhile, he said, West African supply was looking vulnerable and not sustainable, especially when measured against other competing crops like palm.
A lively debate followed with a number of questions from the audience for the first session on supply and demand.
Cocoa Farming Profitability
Mr. Friedel Hütz-Adams of Suedwind-Institut examined the concept of a living income for farmers, explaining that the model looked at all sources of income for farming families, in a way it was thought many certified projects based their income goals. The issue of scale was important in this area, determining, for example, whether a farmer could survive on one hectare of cocoa. Another issue was whether increased cocoa quality was reflected in increased prices.
Governments need to set legal the framework in order to begin to achieve anything near a living income, he said and commit themselves in a transparent way to reinvesting part of their cocoa revenues in cocoa production regions.
Mr. Hütz-Adams, who has co-authored the Cocoa Barometer, which looks at the issue of farmer incomes, also stressed the need for reliable data in this area, so that farmers can eventually take a more equitable share of the world market price.
Ms. Nira Desai of the World Cocoa Foundation’s CocoaAction programme also highlighted the evaluation of the profitability of cocoa farming in West Africa, from models comparing three scenarios: no intervention, replanting 3% of trees and replanting 10% of trees. No intervention showed how net income gradually falls, 3% replanting showed a very slow rehabilitation without any yield increase and 10%, despite an initial drop, showed a strong rebound of both yield and income.
The aim of the WCF’s work in this area, Ms. Desai said, was to migrate the model to other origins and join with others doing this kind of research, to identify the most useful ways of using it to develop actions that could positively affect farmer incomes.
Speaking on behalf of Jean-Marie Coulibaly of GIZ/PROFIAB, who could not attend, Ms. Beate Weiskopf of the German Initiative for Sustainable Cocoa, GISCO reported on research looking at 650 households in the cocoa producing region of Côte d’Ivoire and broke down elements of income from cocoa itself (which averaged at about 71% of total income) and other sources including livestock and other crops.
The research found that household needs (divided into spending areas including most importantly food, equipment, education and health) meant that the average requirement among the surveyed households was for CFA4.6m (or about €6,000) per annum. Unfortunately, she said, most of the families being researched could not cover six months’ worth of these requirements.
Increased diversification, however, has a direct impact on income and livelihoods of the families, and should be considered as one way out of this situation.
More debate involving the audience followed the cocoa farming session, including questions raised among the presenters about sharing of data in this area.
Business opportunities in cocoa processing
Moving from farming, and its issues, to the business opportunities in cocoa processing for the next session, Dr. Michele Nardella, the ICCO’s Senior Econometrician took the audience through market integration and vertical integration in the cocoa business. He highlighted the value added by the global cocoa chain, showed the structure of the market divided between brand name chocolate makers their suppliers, the merchant contractors who manufacture semi-finished and finished chocolate to their specifications, and stressed the concerns inherent in this economically inefficient system.
Pointing out that the high barriers to entry into the chocolate manufacturing and cocoa processing sector brought with them the potential for oligopolistic or monopolistic power in cocoa purchasing, he tested the hypothetical transmission of symmetric price, in the UK and US supply chains and concluded that there is asymmetric distribution of bargaining power in the global supply chain, and suggested providing countervailing power to primary producers.
Representing one of the largest of the processors, Cargill Cocoa and Chocolate, was Ms. Francesca Kleemans, who noted that while cocoa prices have almost doubled in the past three years, world crops have been no more than stable, and there are still threats to various origins.
Meanwhile, in the emerging private label and discounted retail consumer market, chocolate is being used as an attractive product, about a third of it on constant promotion, and in no way is a luxury product, but instead a mass consumer good.
Almost all investment in processing in recent years has been in Africa and Asia, she said, and this shift from grinding at origin rather than at destination was thriving in the current challenging environment. She put this success down to quality, efficiency and the effective managing of risk.
Questions from the audience related to the session included a discussion about farmers not benefitting from price increases.
Recent developments on the cocoa futures markets
Mr. Jonathan Parkman of Marex Spectron reviewed the explosion in cocoa futures contracts from two to five in the past year, reminding the audience that while competing contracts offer choice for users, help keep contracts relevant and safeguard trading costs, they can also dilute liquidity, give rise to regulatory jurisdiction issues and allow no margin offsetting between competing exchanges.
He then outlined the differences for users in the two new Euro-denominated contracts, under ICE and CME, saying that the impending marketing of 2016/17 crops will provide the first real choice for the trade and industry.
Nevertheless, neither of the exchanges addresses the huge growth in grinding in Asia and Africa, he added, and because of restricted delivery points, neither of them is a good hedge. He described them as “a poor fit” for the “new” industry, and forecast that there would no longer be five contracts still in existence in a year’s time.
Conference Chair Ms. Judith Ganes-Chase then outlined the background to the new futures contracts in her own presentation, pointing out that they had been developed to respond to industry and addressed issues that users themselves had demanded.
Nevertheless, despite the fact that the new contracts had some good and new points, she warned that most new contracts ultimately fail, normally through lack of participation.
The chocolate market: diverse and buoyant
In a presentation entitled ‘Judging Growth Priorities in Chocolate’, Mr. Jack Skelly of Euromonitor International gave an overview of the global chocolate sector, contrasting the two main components and their marketing methods. Despite the sector showing 33% growth worldwide between 2010 and 2015, he said, except in some Asian markets, consumption was slowing. A combination of already high consumption levels in the developed markets, increasing health awareness and more alternative snack availability was leading to very slow growth in chocolate.
Market development would be down to improving accessibility and making chocolate more affordable, a strategy already working in markets like India, where lower price points, even on branded products, were having the desired effect in improving shares.
The mature markets, meanwhile, would have to either promote value and affordability, or else go the premium route, emphasising high end products to appeal to the more demanding consumer. The latter, successfully handled, could lead to higher profit margins and good growth, and this move to the high end was already being seen within the big brand portfolios.
Mr. Jerwin Tholen of KPMG reminded the audience that 70% of growth in the world’s confectionery markets is currently taking place in eight world markets – all of which are hot and low income countries. The confectionery sector, including chocolate, could benefit from the fact that special occasions are under-represented in these markets and this sector is ripe for growth.
The changing tastes of consumers in the market were resolving themselves down to distinct value, luxury and so-called “hybrid” sectors in chocolate, and traditional preferences were not necessarily taking hold everywhere. Dark chocolate already has a 34% share of the Chinese market – the highest share of this type in the world – and this preference was beginning to change markets elsewhere as well, he said.
At the same time, innovations in products themselves – including more flavours, healthier ingredients, single origins and bite-sized portions – were making themselves felt on world markets.
Fine chocolate can only be made from fine cacao, was the theme of the presentation by Mr. Martin Christy, Chair of Direct Cacao, Head Judge of the International Chocolate Awards, Vice President of The Chocolate Way and Founder and Editor of Seventy%.
In a wide-ranging talk, he reviewed the characteristics of fine chocolate – complexity, richness, distinctiveness and aftertaste, for example – which set it aside from run-of-the-mill products, and the sensory analysis required to determine the quality level. His work involves developing flavour charts based on established flavour notes, which could be used to increase the transparency in identification and the establishment of quality.
Mr. Christy advocated creating value with the flavour characteristics of fine chocolate, in the same way that sommeliers do for fine wines. By the same token, creating new price points for fine chocolate is important, to accustom consumers to pay for these quality products.
The size of the market was behind many of its challenges, he added. Shipping small quantities to small customers is difficult, and the cocoa price and the differential are both too low, he said. But the potential rewards for developing this sector of the market are huge – the same development has already worked with great success in coffee and in wine, he reminded the audience.
In concluding the Conference, Chair Ms. Judith Ganes-Chase thanked the many speakers for their time, and the audience for its participation and engagement with the various topics.
Audience reaction to the Conference was mostly very favourable, and the content of the presentations was universally praised in a survey carried out afterwards by the Secretariat. It is expected that the Cocoa Market Outlook Conference could be repeated on a regular basis with the same degree of success.
The Conference presentations are available to download by clicking on the highlighted presenter names above
Videos of all of the presentations, and the various question and answer sessions, are available on the ICCO’s YouTube channel, which can be accessed by clicking here.
The 2016 edition of the Cocoa Market Outlook Conference has been confirmed for 27 September 2016 at the Holiday Inn, Wembley. For more information, including topics, speakers, sponsorship and how to attend, click here.