Cocoa price hits a 33-year high over crop fears

Cocoaprices hit a 33-year high on Monday on the back of improving demand from the chocolate industry and a disappointing crop in Ivory Coast, the world’s top grower of the commodity.

The combination sent the benchmark Liffe July cocoa contract to £2,368 a tonne, the highest for the second front-month contract since October 1977, and up more than 1 per cent on the day.

Cocoa demand is outstripping supply for the fourth consecutive year during the 2009-10 season, marking the longest period of shortage since 1965-69. Ivory Coast accounts for nearly 40 per cent of the world’s cocoa bean output.

But it is the improving outlook from the demand side that has triggered the latest surge in prices, said Kona Haque, agricultural commodities analyst at Macquarie in London. US cocoa processing, a measure of demand for the bean used in chocolate, rose 16 per cent in the first quarter of 2010 from a year earlier.

“We are looking at a strong phase of growth in America now,” Ms Haque said. She added that aggressive marketing, such as two-for-one deals, had boosted retail sales.

Tobin Gorey, soft commodities analyst at JPMorgan in London, said that stronger end-demand, as opposed to simple inventory rebuilding, could tighten the starting point for the next set of crop worries. “Reflecting the demand-only drivers, prices have rallied,” he said.

Cocoa traders argue that the 2010-11 crop season, which starts in October, will see another poor harvest in Ivory Coast, potentially below this season’s low numbers due to low fertiliser use and ageing trees.

“We do have a problem,” said the head of a global cocoa trader in Abidjan, the commercial capital of Ivory Coast. “The price needs to rise to encourage new planting and keep farmers from switching to rubber,” he added.

Traders say Ivorian harvesting is set for a slow start, which is likely to push cocoa prices higher in the final quarter of the year.

The chocolate industry and cocoa traders are also concerned about a drop in the quality of Ivorian beans.

There is a divide in the market over whether cocoa demand will outstrip supply for the fifth consecutive year. Some analysts, including Fortis Bank, are forecasting a small surplus. But some commercial traders and chocolatiers see the potential for another deficit and higher prices in late 2010.

Juergen B. Steinemann, chief executive at Barry Callebaut, the cocoa group and the world’s largest producer of chocolate products, recently told investors his company did not believe that cocoa prices would fall. “We rather see some upside potential,” he said.

The weaker pound has boosted the benchmark sterling-denominated cocoa, but the dollar-denominated contract is also at historically elevated levels. ICE May cocoa gained 1.6 per cent to $3,232 a tonne yesterday, about $200 short of its own 31-year peak.

Elsewhere in commodities markets, Nymex June West Texas Intermediate crude oil fell 92 cents to $84.20 a barrel, $2.63 cheaper than Brent oil. WTI normally trades at a premium to the European benchmark, but historically high US crude oil inventories have caused the normal price relationship to break down.

Spot palladium hit a fresh two-year peak, gaining 1.8 per cent to an intraday high of $570.50 an ounce.