Commodity analysis - Cocoa

22nd August 2012

Presented by Group 5

Table of contents
Global scenario Production Acreage Trade Trading markets Indian scenario Production Acreage Trade Trading markets Value chain analysis Price analysis Fundamental analysis of cocoa

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19 23

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Global scenario

Production of cocoa
Production requirements

Cocoa is produced in countries in a belt between 10N and 10S of the Equator, where the climate is appropriate for growing cocoa trees. And hence, the largest cocoa producing countries in the world are Cte d'Ivoire, Ghana and Indonesia. The natural habitat of the cocoa tree is in the lower storey of the evergreen rainforest, and climatic factors, particularly temperature and rainfall, are important in encouraging optimum growth. Cocoa plants respond well to relatively high temperatures, with a maximum annual average of 30 - 32C and a minimum average of 18 - 21C. Variations in the yield of cocoa trees from year to year are affected more by rainfall than by any other climatic factor. An annual rainfall level of between 1,500mm and 2,000mm is generally preferred. A hot and humid atmosphere is essential for the optimum development of cocoa trees. In cocoa producing countries, relative humidity is generally high: often as much as 100% during the day, falling to 70-80% during the night. Cocoa needs a soil containing coarse particles and with a reasonable quantity of nutrients, to a depth of 1.5m to allow the development of a good root system. Cocoa will withstand water logging for short periods, but excess water should not linger. The cocoa tree is sensitive to a lack of water, so the soil must have both water retention properties and good drainage. Cocoa can grow in soils with a pH in the range of 5.0-7.5. It can therefore cope with both acid and alkaline soil, but excessive acidity (pH 4.0 and below) or alkalinity (pH 8.0 and above) must be avoided. Cocoa is tolerant of acid soils, provided the nutrient content is high enough. The soil should also have a high content of organic matter: 3.5% in the top 15 centimetres of soil. Soils for cocoa must have certain anionic and cationic balances. Exchangeable bases in the soil should amount to at least 35% of the total cation exchange capacity (CEC), otherwise nutritional problems are likely. The optimum total nitrogen / total phosphorus ratio should be around 1.5.

Varieties of cocoa
Three main varieties of cocoa are grown in Africa

Criollo

When Criollo pods are ripe, they are long, yellow or red, with deep furrows and big warts. This variety does not produce as much as the others but the cocoa is of very good quality. It is grown mainly in America.

Forastero (Amelonado)

The pods are short, yellow, smooth without warts, with shallow furrows. This variety produces well, but the quality is not as good as Criollo. It is grown a lot in Africa.

Trinitario

This variety is a cross between Criollo and Forastero. The pods are long or short, red and yellow. It yields cocoa of fairly good quality.

Global production of cocoa

Global production

The global production of cocoa has increased at a CAGR of 2.6% in last two decades, however in past 5 year the production increased at CAGR of 1.5%.

Leading countries in cocoa production

Region wise production of cocoa

Africa has the largest share in global cocoa production.

Cote dIvoire is the leading cocoa producing country in the world. The production has decreased at a CAGR of 3% in the country during 2006 and 2010. Of the top six cocoa producing countries, Cameroon reported the maximum growth in cocoa production during 2006 and 2010, ~13%.

Acreage
Acreage

Cocoa Acreage
Country Acreage ('000 Ha) 2,000 1,500 1,000 500 0 2003 2004 2005 Cte d'Ivoire Ghana 2006 Nigeria 2007 2008 Indonesia 2009 World + (Total) 2010 0 10,000 5,000 World Acreage ('000 Ha) 2,500 15,000

Cocoa yield
Country Yield (Hg/Ha) 8000 6000 4000 2000 0 2004 2005 2006 2007 2008 2009 2010 4000

5000
4500

World acreage increasing at 6% CAGR Maximum land under cocoa cultivation is in Ivory Coast Yield of cocoa has been decreasing due to the primitive farming practices employed in major producers Nigeria has relatively better yield and thus can become a preferred sourcing partner for cocoa consumer companies

World Yield (Hg/Ha)

10000

5500

Global exports
Global exports

Top Cocoa Exporters and total export

Countrywise Exports ('000 Tons) 1000 800 600 400 2800 2600 2400 2007 2008 Cte d'Ivoire Indonesia 2009 Ghana Netherlands 2010 Nigeria Total 2011 3200 3000 Total Export ('000 Tons) 1200 3400

The topmost, consistent exporter of cocoa in the world is Cte dIviore or Ivory Coast Worlds 50% cocoa is exported from African nations Total world Cocoa exports are increasing at 4.4% CAGR Ivory Coast and Ghana are the topmost cocoa sourcing destinations for companies like Nestl and Cadbury Modernization in African agriculture and various initiatives by companies to help cocoa farmers are expected to increase the cocoa production and export from these countries Indonesian exports fell abruptly due to higher returns, about 150%, offered by Palm Oil to the farmers

200
0

6.27% 6.98%

9.12%

38.55%

26.96%

Cte d'Ivoire

Ghana

Nigeria

Indonesia

Netherlands

Global imports
Global imports

Cocoa imports and total imports

628.76 681.03 470.89 355.75 334.09 178.46 731.81 686.05 463.88 446.89 327.08 201.59 3,350 3,300 442.37 369.50 290.02 157.42 402.06 341.27 319.44 162.86 3,250 3,200 3,150 3,100 Total world imports ('000 Tons) 900 800 700 600 500 400 300 200 100 0 Country Imports ('000 Tons) 775.55 3,400

438.87 355.14 354.27

186.82

3,050
2007 Netherlands 2008 United States of America 2009 Germany 2010 Malaysia Belgium 2011 Total

Topmost importer of cocoa is Netherlands World import has increased at 1.16% CAGR These top importers figure in the worlds top cocoa finished products exporters Most of these countries are developed nations, which signifies that chocolate consumption and cocoa trade is a lifestyle phenomenon

Major global trading markets

Major global trading markets Mostly, the main exporters are also the main producers of cocoa beans Although countries like Brazil and Malaysia are main producers, they are not among the large exporters due to the size of their processing industry, which absorbs local production Cocoa is traded much the same as metal or other commodities since Cocoa beans can be held in storage for several years in bags or in bulk The leading cocoa beans importing nations are the Netherlands, United States and Germany, which account for more than half of world cocoa imports. Companies like Barry Callebaut, Cargill, and Archer-Daniels-Midland Company (ADM) buy cocoa in bulk from Cote d'Ivoire, Ghana, Indonesia and a few South American countries, then process and sell it to confectioners like Hershey Foods (HSY), Nestle (NSRGY), Mars, and Cadbury Schweppes (CSG) , to melt, mold, and package.

Top Cocoa Bean Processors

Top Cocoa Bean Processors

The top 3 MNCs involved in cocoa beans processing process over 40% of cocoa beans worldwide every year.
Top MNCs in Processing
16% 14% 12% 10% 8% 6% 4% 2% 0%

Major manufacturers of Chocolate are: Mars, Inc (USA) Cadbury Schweppes PLC (UK) Nestle SA (Switzerland) Ferraro SpA (Italy) Hershey Foods (USA) Kraft Foods (USA) Lindt & Sprngli AG (Switzerland) Barry Callebaut AG (Belgium/France)

15%

14%

13%

5% 3% 2% 2% 2%

Archer Daniels Midland

Cargill

Barry Callebaut

Nestle

Cadbury Hershey Ferraro

Mars

Total Contribution (%)

Most of the major cocoa processing companies are also the top manufacturers of Chocolate in the world.

Cocoa Market Trading

Cocoa Market Trading Cocoa is traded in both the physical markets as well as the futures markets. Physical Markets Nearly all cocoa coming from origin countries is sold through the physical market Involves buying of the cocoa beans directly from the farmers by the small traders and then selling them to the wholesalers, who in turn resells them to the exporters Once they reaches to the port they are stocked in the warehouses After being graded they are subsequently loaded onto cargo vessels Sometimes the processing of the beans is done in the conditioning plants present in the ports

Cocoa futures contracts They are traded on two primary exchanges: Euronext.liffe in London Intercontinental Exchange (ICE, formerly the New York Board of Trade) in New York. The London market caters to West African cocoa and New York on cocoa from Southeast Asia The option contracts are available for trading at NYSE Euronext (Euronext) and New York Mercantile Exchange (NYMEX). Cocoa options are option contracts in which the underlying asset is a cocoa futures contract

Indian scenario

Production in India
Production in India Cocoa, a native of Amazon base of South America, got its entry into India in the early half of the 20th century Administratively it is conferred plantation status like coffee, tea and rubber but is seldom recognized as a plantation crop under the Indian Agrarian Administrative Sector. It is also one of the supporters of Agro-based industry in India The commercial sector of cocoa in India hardly takes place in a major way in the international export trade. Majority of the processed cocoa products are consumed within India The tropical diversified congenial climate available in India provides immense scope for its cultivation. Cocoa has the capacity to share the alley spaces of tall growing Coconut and Arecanut palms and its combining ability with the microclimatic conditions available in such perennial gardens helps its cultivation in utilizing such areas without exacting for an independent growing climate of its own. In any groves of tall growing palms where 40-50% sunlight penetration is possible, cocoa stands first to absorb such solar energy, remaining symbiotic to the main crop and generating additional income as well, besides helping the amelioration of the soil conditions making beneficial not only for its own growth but also for the benefit of the main crop under which it takes its shelter.

Production in India (cont.d)

Production in India Kerala is the leading State in promoting cocoa cultivation. Massive area coverage was possible through distribution of cocoa seedlings. Cadbury India Ltd., was the only industrial unit during the period of massive expansion of area under cocoa. There was an attractive price for cocoa pods and beans prevalent till 1980's. This favourable situation, coupled with large scale distribution of planting materials could bring about an enviable area coverage recording 29,000 ha under cocoa by 1980-81. Being a crop subjected to the monopolistic exploitation of the available industrial unit, however paved ways for fall in price in 1981-82 and 1982-83. Inadequate marketing network and the fall in price developed a sense of insecurity among the planting communities, which detrimentally affected its expansion besides attributing to a neglectful approach by the plantation community. The entry of CAMPCO towards the marketing scenario from 1990's, though created a favourable atmosphere, the services rendered towards procurement of cocoa was far below the requirement. As a result, expansion of cocoa came to a standstill in spite of favouring the growers with a better price. From 1997-98 onwards the non-traditional tracts of Karnataka and other States like Andhra Pradesh and Tamil Nadu started developing cocoa. With the implementation of 8th Five Year Plan programmes through distribution of high yielding varieties in the form of clones and hybrid seedlings, the area under cocoa is 17,800 Ha. Total production is a meagre 10,200 MT compared to total world production of 27 lakh MT. While Cocoa production has been the monopoly of the south, there are efforts to cultivate it in the Bongaigaon district of Assam . The main aim is to export cocoa to swiss chocolate manufacturers.

State wise production of cocoa in India

Production in India

Cocoa production in metric tonnes

States/Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Kerala 4100 5109 5870 5900 6490 5800 6000 6100 6300 6100 Tamil Nadu 180 155 170 200 220 210 220 230 900 200 Karnataka 1700 2500 2500 2500 2750 2650 2760 2890 3000 2900 Andhra Pradesh 800 633 690 650 715 1520 1580 2600 2700 2600 Total 6780 8397 9230 9250 10175 10180 10560 11820 12900 11800

Major domestic trading markets

Major domestic trading markets Major domestic trading markets in India are: Indian Commodity Exchange Limited ICEX Multi Commodity Exchange MCX National Multi-Commodity Exchange of India Ltd NMCE Cocoa is traded on following markets: Mumbai Kolkata New Delhi Muvattupuzha Ghaziabad Pollachi Coimbatore Anamali Nagercoil Kottayam Meerut Banglore Hyderbad Chennai

Value chain analysis

Intermediaries in the Value Chain

Intermediaries in the Value Chain Smallholder Farmers: average of less than 1.5 hectares each and produce bulk, unfermented cocoa. Average yield on these farms varies from 400 to 800 kilograms per hectare Local Collectors: Local collectors are primarily farmers or rural entrepreneurs who travel to farms and purchase cocoa beans from farmers once or twice per week during the two harvest periods Traders(Local):purchases at collection points up-country and arrange for transport of the beans to the main cities for export. Local Processing and Manufacturing: processing is transformation of dried beans into a variety of processed cocoa products, including: cocoa paste or liquor, cake, powder, and butter. Exporters & Importers: Exporters fumigate cocoa beans before shipping and typically sell to importers on an FOB (free on board) port of embarkation basis for future shipment. Importers source the beans and cocoa for the multinational affilliates Multinational Affiliates(Confectionary, Food Industry & Industrial Artisinal Pharma & Tobacco Consumers):directly supply beans and products to, multinational processors including Cargill and ADM. The processed cocoa products are sold to manufacturers who ar dedicated chocolate manufacturers situated close to final consumers Retailer: point to buy for consumer Consumer: end buyer

Intermediaries in the Value Chain (contd.)

Salient features of intermediaries in the Value Chain

Governance structures in the cocoa value chain are buyer-driven Governance of the chain as bi-polar, dominated by chocolate manufacturers and cocoa traders / processors Cocoa Traders /processors: invisible companies who hold considerable power in the value chain, but are less exposed to campaign pressure as their operations are generally unknown to consumers

Products made from cocoa beans

COCOA MASS
Cocoa beans are roasted and ground into cocoa mass It is an intermediate or semi finished product, which is supplied to the chocolate industry and is also used in producing cocoa butter and powder

COCOA BUTTER
It is made by pressing out fat from the Cocoa Mass It is supplied in liquid form in tankers or in solidified form in cardboard boxes It is used in the production of chocolates, cosmetics and toiletries

COCOA POWDER
It is made from the Cocoa cakes left after the removal of the cocoa butter, which are broken up and ground Powder is the substance which contains the aroma, taste and colour of cocoa Used in biscuits, puddings, creams, filled chocolates, ice cream, chocolate drinks, etc

CHOCOLATE
Made from Cocoa Mass and Butter by Conching and Tempering White Chocolate does not contain Cocoa Mass

Price analysis

Historical price analysis

Historical price analysis Historically, from 59 until 12, Average Price - 1517.1 USD/MT Maxima - 5368.0 USD/MT in July of 1977 Minima - 211.0 USD/MT in July of 1965

Price fluctuations in Cocoa are because of the following reasons -

Cocoa production is highly concentrated. There are only three major producing countries Significant expansion in cocoa production is limited to the same three major producers and hence continued concentration is likely Political uncertainty in some cocoa producing countries Labour supply issues in some producing countries

Historical price analysis (cont.d)

The price rise was because of shortage in Cocoa production Until the middle of the 1970s world cocoa production was only about 1.5 million tons per annum The price peaked in 1977 because the deficit in cocoa production during 1976/77 crop year was expected to be 83000 tonnes

1970s

1980s

The prices fell because the high profit-margins of the 1970s had served as an incentive for cocoa farmers to produce more beans, and so by the end of the 1980s huge surpluses had accumulated which had to be stockpiled

1990s

Between 1985 and 1992, world cocoa production far outstripped demand and prices dropped accordingly By the end of the 1990/91 season, 1.6 million tons of cocoa had been accumulated, equivalent to 67% of the total quantity processed in that year. As a result of this surplus, prices dropped. In June 1992, the world market price for cocoa reached its lowest level in 16 years

2000s

Prices have been rising because of the increase in demand for chocolate. The demand increased by 20 % between 02 and 07 Increased standard of living in India and China are creating demand for chocolate bars, which used to be considered an elite luxury item. Consumption has been increasing at a rate of 15-20 % annually In July 2010, British hedge fund Armajaro, purchased 241,000 tonnes of cocoa beans. The purchase was valued at 658 million and caused cocoa bean prices to rise to their highest level since 1977

Price forecasts
Price Forecast in Nominal US Dollars
350 300 250 200 150 100 50 0 313 260 298

240
127 91

235

230

230

229

228

227

226

225

220 /kg

1980

1990

2000

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2025

Price Forecast in Real 2005 US Dollars

400 300 200 100 131 342 277 242 193 101 187 180 178 174 170 167 163 160 143

0
1980 1990 2000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2025

Fundamental Analysis of Commodity

Supply side drivers

Cot dIvoire and Ghana 50% of world production. Factors affecting these economies affect world cocoa prices. In 2011, Cot dIvoire faced political crisis and had imposed ban on cocoa exports driving up prices by 50% Dry weather in western Africa also has its impact on Cocoa production. With Asian Countries, with stable economies and outlook increasing production, the price is expected to fall in long term. Supply short of demand expected in 2012-13 due to dip in output. Overall shortage of 40000 tonnes expected in 2012-13 against a surplus of 5000 tonnes in 2011-12 Dry weather during development of main crop could worsen the predicted global deficit The average price for 2013 is predicted to be 10% higher than present levels The post political crisis reforms in Cot dIvoire in cocoa sector like introducing fixed farmer price from Oct 1, will have an impact on Cocoa prices. The economic problems in major chocolate consumers in Europe and North America is expected to curtail demand to a smaller extent The global cocoa grinding growth is inline with long term average of 2.5%, with decrease in Europe and North America and increase in Asia.

Output ( K tonnes) 2012-13 (expected) 2011-12

Cot dIvoire 1350 1410

Ghana 850 890

Source ICCO

Demand Drivers
Going forward, the emerging markets of Asia, South America and Eastern Europe will be the locomotive of growth Global production was 3.56 million tonnes in 2010, by 2020 we will need sustainable world cocoa production of at least 4.6 million tones Strong long-term correlation between cocoa demand and world GDP growth Seasonal and boxed assorted chocolates have been experiencing the fastest growth, and sales are expected to expand 13% between 2010 and 2015 We can expect successive supply deficits in the coming years, which will offset any increase in supplies from the new entrants, thus exerting an upward pressure on prices.

Impact of demand in India

According to Cadbury's India forecast, cocoa demand is growing by about 15 per cent annually and will reach nearly 30,000 tonnes in the next five years. Cocoa prices are on a roll with chocolate makers scrambling for Indian cocoa in the wake of lower global production, import duty of 30 per cent and increasing transportation costs deterring import. According to officials of the Directorate of Cashew and Cocoa Development (DACCD), with the government increasing the subsidy for cocoa farming by almost Rs 10,000 for a hectare from April 1, 2010, the area under cocoa is likely to increase by 30-40 per cent in the next two years DACCD plans to bring another 75,000 hectares under cocoa cultivation in the next five years. Focus of the cocoa crop expansion programme will be Andhra Pradesh, Tamil Nadu and Karnataka, with the Directorate spending Rs 77 crore under the 11th Plan. To secure good quality raw material in the long run, private players are encouraging cocoa cultivation. Cadbury India's Cocoa Department produces over 2.5 million hybrid seedlings annually and distributes them among farmers.

Commodity Balance Sheet

World
(000 tonnes) Beginning Stocks Production Imports Consumption Exports Net Availability Ending Stocks 2011 3146 4000 3343 3805 3312 10489 3372 2010 2546 4187 3304 3881 3010 10037 3146 2009 1955 4091 3150 3712 2938 9196 2546 2008 809 4255 3158 3504 2763 8222 1955 2007 0 3960 3191 3558 2784 7151 809

Production ('000 tonnes)

4300 4250 4200 4150 4100 4050 4000 3950 3900 3850 3800 2011 2010 2009 2008 2007 4000 3500 3000 2500 Production ('000 tonnes) 2000 1500 1000 500 0 2011

Trade Data in the World

Imports Exports

2010

2009

2008

2007

Commodity Balance Sheet

India
(tonnes) Beginning stocks Production 2011 1179 12180 2010 291 11820 2009 936 10560 2008 149 10180 2007 0 10175

Imports
Consumption Exports Total Supply Ending Stocks

10525
21625 541 23884 1718

10270
20725 477 22402 1179

8375
18985 595 19892 291

8555
17875 73 18950 936

6624
16650 0 16799 149

Production of Cocoa in India

12500 12000 11500 11000 10500 10000 9500 9000 2011 2010 2009 2008 2007 Production(tonnes) 12000 10000 8000 6000 4000 2000 0 2011

Trade Data in India

Imports Exports

2010

2009

2008

2007

Bibliography
www.Indiastat.com ICCO, Quarterly bulletin www. faostat.fao.org World Cocoa Foundation websites The International Cocoa Organization

Thank You