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High costs for cocoa to prevail on stock shortfall

By Lindsey Partos , 10-Jun-2008

High prices for cocoa manufacturers will prevail as an investment bank predicts a third successive global cocoa deficit in 2008/09.

Anticipating a marginally smaller shortfall of 21,000 tonnes, down from 29,000 tonnes in 2007/08, Fortis said in a monthly report that global production could hit 3.76 million tonnes, slightly up, just one per cent, from 3.66 million a year earlier, but a shortfall nevertheless. Further, the bank pitches global stocks-to-grindings (demand) ratio for 2008/09 at 42 per cent, down from 43 per cent estimates for 2007/08, but a figure that will still certainly contribute to upward prices for cocoa. Prices Cocoa prices peaked on 13 March this year, with ICE Futures US cocoa 2nd position seeing prices closing at $2,922 a tonne, "a staggering 39.2 per cent higher on the start of the year", say the Fortis report authors. While the same contract fell to $2,285 a tonne by 24 March, at the end of May it came in at $2,737 a tonne, 'still 30.5 per cent higher than at the start of 2008', continues the report. And these higher prices are attracting considerable interest from speculators. Tempted by potential gains to be had through the price volatility of the commodity market, institutional investors from outside of the food industry have recently brought "vast amounts of money" to agricommodity markets, say the UN. Not only cash, but also upward price pressure for commodities used by food business players reliant on the physical stocks for their manufacturing needs. FAO And in a far-reaching report on global commodity staples, the UN's Food and Agricultural Organisation (FAO) earlier this month drew particular, critical, attention to the role speculators may have played in the recent rise in global food prices. "A key concern now is the participation of new agents that are perceived to be motivated by risk-diversification to the exclusion of serious assessment of price levels," states the FAO's annual Outlook report. Derivative-markets prices, such as options and futures for wheat, cocoa and maize, are widely quoted as indicative prices and are the focus of much commercial activity. Volatility At once attracted by the volatility of the market, institutional investors also contribute to the price volatility: the aggregate effect of all the activities of institutional investors in the commodity markets is that the speculators are, arguably, pushing up derivative market prices in the short term. In turn, driving up the raw material prices for the food supply chain, from farmer and ingredients maker, to processor and retailer. The Fortis report highlights the same phenomenon, and draws attention to the notion that heavy speculation may directly impact cocoa users. "Whatever one's views of the merits of this {investment interest in agricommodity markets}, accommodating the large inflow of investment has proved tough for traditional users of the cocoa market," states the Fortis report. Cocoa deficit Indeed, according to the report, manufacturer forward cover for cocoa is currently about five months, "which remains low by historic standards". And as the cocoa deficit continues into 2009, there is little doubt that pressure on the futures market for prices will remain, in turn meaning speculators will certainly maintain their interest, thereby also contributing to upward price pressure.


A pressure set to remain for some time. According to Fortis, even the characteristics of investment in cocoa has altered to long-term, shifting from "a short-term speculation to a wider view that commodities are a legitimate asset class that should occupy a place in a normal investment portfolio for the medium and long term."

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