Last year’s best-performing commodity is poised to become the market’s worst nightmare.
After the longest rally in London cocoa futures since at least 1989, farmers from Ivory Coast to Peru are preparing to revive supplies in the 2016-17 season that starts in October, creating a surplus that Rabobank International says will be the largest in six years.
With demand slowing, the bank is most bearish about prices for the chocolate ingredient this year among the dozen agricultural commodities it tracks.
Prices surged 60% during a four-year rally through 2015, forcing confectionery makers from Hershey to Lindt & Spruengli to charge more for their products.
Last year, El Nino weather patterns left dry conditions that hurt cocoa crops, including in West Africa, which produces about 70% of the world’s beans.
London futures in December reached £2,332 (€3,176) a metric ton, the most since 2011, when a civil war disrupted exports from Ivory Coast, the top supplier.
“We expect these very good international prices to incentivise production,” said Carlos Mera, an analyst at Rabobank in London.
Cocoa was an anomaly last year, rising 14% in London, when almost every other major commodity tumbled.
Rabobank says cocoa futures in London may slide to £1,800 by the fourth quarter, down 17% from yesterday’s close at £2,163.
The bearish outlook is also being driven after chocolate makers cut demand for new supplies. Meanwhile, dry conditions from El Nino probably will be replaced by a more favourable La Nina pattern.
While farmers in Ivory Coast and Ghana continue to dominate supply, output is growing in Latin America.
Countries in the region have been planting high-yielding trees, according to the London-based International Cocoa Organisation.
Production in Ecuador rose 6.8% in 2014-15, and expansion is occurring in Colombia and Peru, the industry group said.
“Offers are starting to increase from places like Central America as producers look to cocoa to replace coffee,” Jack Scoville, vice president at Price Futures Group in Chicago, said.
After a production deficit of about 150,000 tons in the 2015-16 season that started in October, the world will soon have more supply than it needs.
Output will exceed demand by 93,000 tons in the 2016-17 season, according to Rabobank.
That would be the biggest glut since 2010-11.
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