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Pressure for chocolate industry as cocoa breaks $3000 barrier

By Lindsey Partos , 15-Jul-2008

Strategies for confectionery makers to absorb rocketing price rises are essential as cocoa prices crash through the $3000 barrier, with demand outstripping supplies and pulling the stocks-to-grindings ratio to a 22-year low.

In June, cocoa futures in London soared to £1,662 per tonne, their highest level for 22 years and a massive 50 per cent rise on the previous year.

 

 

 

In New York, the same picture pushed prices to a 28-year high, driven by a 53 per cent rise on 2007, and pulling in prices for cocoa at $3,150 per tonne.

 

 

 

Competition for supplies largely drove the price hikes with"the volume of cocoa reaching ports in Côte d'Ivoire in the first two months of the mid crop period (April-May) disappointing compared with expectations," writes the International Cocoa Organisation (ICCO) in its June review of the cocoa market.

 

 

 

Mechanisms to cope with such a challenging climate are high up on the agenda for chocolate suppliers and makers. Swiss maker of bulk chocolate Barry Callebaut, for example, absorbs just a slice of the price rises.

 

 

 

"Our business model is such that we can pass on 80 per cent of raw material prices to our customers," Gaby Tschofen, head of corporate communications tells ConfectioneryNews.com.

 

 

 

The remaining 20 per cent is absorbed by the firm, reflecting a model that held the cocoa maker in good stead for its nine month results announced earlier in July, with revenues gaining positively from the 'historically' high raw material prices.

 

 

 

The Swiss firm, that sells to confectionery giants such as Nestle and Hershey, reported sales volumes of 872,993mt for the first nine months to May 31, 2008, a rise of 10 per cent on the same period in 2007.

 

 

 

Such strong volume growth propelled nine months sales to rise by 19 per cent to 3.61 billion Swiss francs (€2.24billion), up from CHF3.04 billion in the year ago period.

 

 

 

When asked about strategies to lock-in contracts and supplies, Barry Callebaut declined to comment today to ConfectioneryNews.com, but a recent report on the cocoa market by investment bank Fortis indicated that 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.

 

 

 

Further, the report by Fortis highlighted the notion that the upward pressure on prices through heavy speculation may directly impact cocoa users. At once attracted by the volatility of the market, institutional investors also, in fact, contribute to the price volatility.

 

 

 

The aggregate effect of all their activities in the commodity markets is that the speculators are, arguably, pushing up derivative market prices in the short term.

 

 

 

In turn, they are driving up the raw material prices for the food supply chain, from farmer and ingredients maker, to processor and retailer.

 

 

 

"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.

 

 

 

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."