Crazy for Cocoa

By Rothberg, David | Modern Trader, July 1994 | Go to article overview

Crazy for Cocoa


Rothberg, David, Modern Trader


An era of cocoa surplus ended in 1991 when, in real terms, cocoa prices fell to their lowest levels since World War II. So the question of a major bull market in cocoa is not if -- but when?

History may provide the answer. By examining cocoa prices in the 1960s, it's possible to come up with a likely scenario for cocoa activity in the coming year.

In 1965, after seven straight years of cocoa production deficits, stocks fell to 3.8 months of usage. By 1968-69, prices averaged $966 per ton, a 155% gain over the 1964-65 cocoa year average price of $406 per ton.

Similarly, we are now in the third year of a sequence of production deficits, with no end in sight, and coming off a low of $897 per ton for the average price in New York during 1992-93.

Long-term fundamental trends are even more bullish than in the 1960s, although it doesn't seem so at first glance.

The United States Department of Agriculture, for example, scaled back previous estimates of the cocoa crop deficits for the current crop year (1993-94) to a mere 52,000 tons from highs of 200,000 tons.

Near ideal growing conditions have existed in many cocoa producing nations. The world's largest producer, the Ivory Coast, is now expected to harvest a crop of nearly 820,000 tons, up 20% over last year's production and 10% over earlier expectations.

Crops planted in Malaysia in the mid 1980s are just now reaching full maturity, with the crop expected to yield 230,000 tons. This year's Indonesia crop is pegged at 250,000 tons, and production has grown by 10% a year in line with government goals to produce 400,000 tons and become the world's second largest producer by the year 2000.

Meanwhile, consumption has been below trend this year because of ongoing global economic sluggishness and soft demand from the troubled former Soviet states.

So why should savvy investors be long cocoa? First, because of the trend in production. With current prices below production cost, inadequate husbandry points to decreasing yield per tree.

Some growers have switched to more profitable crops. …

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