Cocoa processing in Europe, the largest consuming region, probably rose in the third quarter as grinding became more profitable due to dwindling stockpiles of cocoa butter, a key ingredient in making chocolate.
The grind, an indication of demand, gained 1 per cent in the three months through Sept. 30 from a year earlier, according to the mean estimate of 18 traders, brokers and grinders surveyed by Bloomberg. That would be a second successive gain following the previous quarter’s 0.6 per cent increase, data from the European Cocoa Association showed. The ECA will publish third quarter figures on Oct. 14.
Processing the beans, this year’s best performer in the Standard and Poor’s GSCI index of 24 raw materials, yields cocoa butter, which accounts for about a fifth of the weight of a chocolate bar, and cocoa powder, used to make soft drinks and cookies. Lower butter inventories pushed a measure of a grinder’s profitability up by 8.2 per cent since the end of May, according to KnowledgeCharts, a unit of Commodities Risk Analysis.
"If we went from reasonable stockpiles in the first quarter to a tight market, that suggests that consumption has been growing at a faster pace than grindings,” said Jonathan Parkman, co-head of agriculture at broker Marex Spectron Group in London. “To close that gap, processing will have to rise."
Higher Prices
Higher prices for cocoa butter in the near term suggests inventories have diminished, he said.
Responses in the Bloomberg survey varied from a decline of 1 per cent to an increase of 1.5 per cent. A 1 per cent rise in grindings would imply processing totalled about 331,165 metric tons in the three months through September, based on the Brussels-based ECA’s estimate for last year’s third quarter. Europe accounts for about 38 per cent of global cocoa processing, the International Cocoa Organisation estimates.
Cocoa has gained 5.7 per cent in London this year as El Nino threatens crops while output in Ghana, the second-largest producer, fell short of forecasts. Still, prices reached a one-month low this week on speculation top grower Ivory Coast will sell more beans after international companies and local shippers reached an agreement on ways the commodity is exported.
"Better-than-expected Q3 grind figures, disappointments in arrivals or continued dryness would add to the bull story and potentially bring enough buyers back into the market," Rotterdam-based trader Cocoanect said in an Oct. 6 report. Favorable weather that aids crops and a weaker processing figure will probably push prices down further, it said.
The so-called combined ratio, a measure of processing margins, rose to 3.02 times the cocoa price on Oct. 2 from 2.79 at the end of May, KnowledgeCharts data show. While Cocoanect expects grindings to rise in the fourth quarter also, the recent improvement in profit margins probably won’t last into next year, it said.
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