Cocoa prices can hold at their current high level, give ongoing threat of dryness in West Africa, ABN Amro said. The bank said that weather factors were “particularly important” at the moment, as West Africa, from where most of the world’s cocoa comes, is currently in the main production seasons.
“El Nino, may well severely disrupt production in West Africa, while demand is continuing to rise,” said ABN . “The result is a growing shortage, which we expect to keep prices at their current relatively high level in the coming period.”
The El Nino effect is associated with dryness in West Africa.
And the end of the year, when the El Nino effect is at its highest, coincides with both the peak of production, and the harmattan, a cold dry wind that sweeps into West Africa from the Sahara, and can severely hamper the cocoa crop.
Falling cocoa production is opening up a shortfall, as demand outstrips supply. “The estimated shortage of 15,000 tonnes in the 2014-15 season is expected to grow further in the current 2015-16 season,” said ABN.
The ICCO (International Cocoa Organization) sees a shortfall of 96,000 tonnes this season, and ABN reports that “Commercial market parties also foresee a bigger shortfall this season”.
Cocoa bucks trend
Cocoa has bucked a bearish trend in commodities so far this year, with prices up 11% so far. Prices are now around their highest level since their 2010 peak, when the civil war in Ivory Coast , the world’s biggest producer, sent prices soaring.
“The strongest price advance came in the second quarter on the back of concerns regarding Ghana’s falling production estimates,” ABN said.
Ghana, the world’s second largest producer, saw a smaller than expected crop in the 2014-15 season.
Production was hit by disease, poor tree quality, less than ideal weather and a continued shortfall in fertilizer and pesticide application. ABN noted other upward pressures on prices, despite continued muted demand.
“These included market uncertainty prior to the Ivory Coast elections and dry weather conditions in Ivory Coast through August and September, but most significantly, the looming threat of El Nino on this year’s worldwide production,” the bank said.
The ABN comments chime with statements made earlier this month by Sunny Verghese, chief executive and founder of Olam International, Mr Verghese said that cocoa was “undervalued”, as he noted the threat posed by El Nino to West African production.
“We were at exceptionally dry conditions even before El Nino took effect in the July to September period,” he said.
“We think that there is more upside [to prices] as a result of how the crops are developing in the key producing countries and the potential impact of a strengthening El Nino.”
News source: agrimoney