Cocoa July 2012 (CCN12)

Cocoa is the common name for a powder derived from the fruit seeds of the cacao tree. The Spanish called cocoa "the food of the gods" when they found it in South America 500 years ago. Today, it remains a valued commodity. Dating back to the time of the Aztecs, cocoa was mainly used as a beverage. The processing of the cacao seeds, also known as cocoa beans, begins when the harvested fruit is fermented or cured into a pulpy state for three to nine days. The cocoa beans are then dried in the sun and cleaned in special machines before they are roasted to bring out the chocolate flavor. After roasting, they are put into a crushing machine and ground into cocoa powder. Cocoa has a high food value because it contains as much as 20 percent protein, 40 percent carbohydrate, and 40 percent fat. It is also mildly stimulating because of the presence of theobromine, an alkaloid that is closely related to caffeine. Roughly two-thirds of cocoa bean production is used to make chocolate and one-third to make cocoa powder.

Four major West African cocoa producers, the Ivory Coast, Ghana, Nigeria and Cameroon, together account for about two-thirds of world cocoa production. Outside of West Africa, the major producers of cocoa are Indonesia, Brazil, Malaysia, Ecuador, and the Dominican Republic. Cocoa producers like Ghana and Indonesia have been making efforts to increase cocoa production while producers like Malaysia have been switching to other crops. Ghana has had an ongoing problem with black pod disease and with smuggling of the crop into neighboring Ivory Coast. Brazil was once one of the largest producers of cocoa but has had problems with witches' broom disease. In West Africa, the main crop harvest starts in the September-October period and can be extended into the January-March period. Cocoa trees reach maturity in 5-6 years but can live to be 50 years old or more. During the course of a growing season, the cocoa tree will produce thousands of flowers but only a few will develop into cocoa pods.

Cocoa futures and options are traded at the ICE Futures U.S. (ICE) exchange and on NYSE-LIFFE exchange in London. The futures contracts call for the delivery of 10 metric tons of cocoa and the contract is priced in US dollars per metric ton.

Prices - Cocoa prices rallied sharply in early 2011 as the presidential election in the Ivory Coast in November 2010 was disputed and disrupted cocoa exports from the Ivory Coast, the world's biggest producer. Cocoa prices rallied to a 33-year nearest-future high of $3,826 per metric ton in March 2011 as the Ivory Coast's President-elect banned exports starting in January and extended the export ban into March of 2011as the presidential dispute continued. The market was also concerned that stockpiled Ivory Coast cocoa beans from the export ban would quickly go bad in hot and humid Ivory Coast warehouses. After the Ivory Coast President-elect regained power in April 2011 and Ivory Coast cocoa exports resumed, prices plunged the rest of the year and posted a 3-1/4 year low in December 2011 at $1898 a metric ton and finished the year down -30.5% at $2109 per metric ton. Another bearish factor for cocoa was increased cocoa production in Ghana, the world's second-biggest producer, which posted a record 2010/11 harvest of 1.025 MMT. This increase in supply prompted the ICO to hike its 2010/11 global cocoa ending stocks estimate +18.5% y/y to a record high of 1.93 MMT.

Supply - The world production of cocoa beans in the 2010-11 (latest data) crop year rose +2.2% to 4.231 million metric tons. The world's largest cocoa producer by far is the Ivory Coast with 29.4% of total world production in 2010-11(latest data). The Ivory Coast's production in 2010-11, rose +1.6% yr/yr. After the Ivory Coast the major producers are Indonesia with 19.2% of total world production in 2010-11, Ghana with 15.0%, Nigeria with 10.1%, Cameroon with 6.2% and Brazil with 5.5%. Closing stocks of cocoa in the 2010-11 (latest data) crop year rose +22.8% yr/yr to 1.834 metric tons.

Demand - World seasonal grindings of cocoa in 2010-11 rose +4.1% yr/yr to 3.867 million metric tons, a new record high. Europe is by far the largest global consumer of cocoa, consuming about 36.3% of the global crop.

Trade - U.S. imports of cocoa and cocoa products in 2011(annualized through November) rose +7.4% yr/yr to 1.313 million metric tons, a new record high.