Commodity analysis - Cocoa

22nd August 2012

Presented by Group 5

Table of contents

Global scenario•Production•Acreage•Trade•Trading markets

3

Indian scenario•Production•Acreage•Trade•Trading markets

14

Value chain analysis 19

Price analysis 23

Fundamental analysis of cocoa 27

Global scenarioGlobal scenario

• Cocoa is produced in countries in a belt between 10ºN and 10ºS of the Equator, where the climate is appropriate for growing cocoa trees. And hence, the largest cocoa producing countries in the world are Côte 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 - 32ºC and a minimum average of 18 - 21ºC.

• 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.

Production requirementsProduction requirements

Production of cocoa

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.

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

Varieties of cocoa

CriolloCriollo

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.

Forastero (Amelonado)

Forastero (Amelonado)

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.TrinitarioTrinitario

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%.

Global productionGlobal production

Global production of cocoa

Africa has the largest share in

global cocoa production.

Region wise production of cocoaRegion wise production of cocoa

Leading countries in cocoa production

Cote d’Ivoire 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%.

AcreageAcreage

Acreage

• 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

Global exportsGlobal exports

Global exports

• The topmost, consistent exporter of cocoa in the world is Côte d’Iviore or Ivory Coast

• World’s 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 Nestlé 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

Global importsGlobal imports

Global imports

• Topmost importer of cocoa is Netherlands

• World import has increased at 1.16% CAGR

• These top importers figure in the world’s top cocoa finished products exporters

• Most of these countries are developed nations, which signifies that chocolate consumption and cocoa trade is a lifestyle phenomenon

• 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.

Major global trading marketsMajor global trading markets

Major global trading markets

Top Cocoa Bean Processors

The top 3 MNCs involved in cocoa beans processing process over 40% of cocoa beans worldwide every year.

Top Cocoa Bean ProcessorsTop Cocoa Bean Processors

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 & Sprüngli AG (Switzerland)Barry Callebaut AG (Belgium/France)

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 & Sprüngli AG (Switzerland)Barry Callebaut AG (Belgium/France)

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

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

Cocoa Market TradingCocoa Market Trading

Cocoa Market Trading

Indian scenarioIndian scenario

• 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 IndiaProduction in India

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.

Production in IndiaProduction in India

Production in India (cont.d’)

Production in IndiaProduction in India

State wise production of cocoa in India

Cocoa production in metric tonnes

States/Year Kerala Tamil Nadu Karnataka Andhra Pradesh Total

2001-02 4100 180 1700 800 6780

2002-03 5109 155 2500 633 8397

2003-04 5870 170 2500 690 9230

2004-05 5900 200 2500 650 9250

2005-06 6490 220 2750 715 10175

2006-07 5800 210 2650 1520 10180

2007-08 6000 220 2760 1580 10560

2008-09 6100 230 2890 2600 11820

2009-10 6300 900 3000 2700 12900

2010-11 6100 200 2900 2600 11800

• 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

Major domestic trading marketsMajor domestic trading markets

Major domestic trading markets

Value chain analysis

Value chain analysis

• 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 ChainIntermediaries in the Value Chain

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

Salient features of intermediaries in the Value ChainSalient features of intermediaries in the Value Chain

Intermediaries in the Value Chain (cont’d.)

Products made from cocoa beans

Price analysisPrice 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

Historical price analysisHistorical price analysis

Historical price analysis

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’)

Price forecasts

Fundamental Analysis of Commodity

Fundamental Analysis of Commodity

Supply side drivers

• Coté d’Ivoire and Ghana – 50% of world production.• Factors affecting these economies affect world cocoa prices.• In 2011, Coté d’Ivoire 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 Coté d’Ivoire 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) Coté d’Ivoire Ghana

2012-13 (expected) 1350 850

2011-12 1410 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) 2011 2010 2009 2008 2007Beginning Stocks 3146 2546 1955 809 0

Production 4000 4187 4091 4255 3960Imports 3343 3304 3150 3158 3191

Consumption 3805 3881 3712 3504 3558Exports 3312 3010 2938 2763 2784

Net Availability 10489 10037 9196 8222 7151Ending Stocks 3372 3146 2546 1955 809

Commodity Balance Sheet

India

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

Imports 10525 10270 8375 8555 6624

Consumption 21625 20725 18985 17875 16650Exports 541 477 595 73 0

Total Supply 23884 22402 19892 18950 16799

Ending Stocks 1718 1179 291 936 149

Bibliography

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

Thank You