Nearly 3,000 miles from the Zurich headquarters of Barry Callebaut (SIX:BARN), Ghana’s cocoa traders are anxiously watching how the Swiss chocolatier will respond to the controversy that's playing out across Europe over AstraZeneca’s (NASDAQ:AZN) COVID-19 vaccine.
The company’s reaction will be important, particularly with regard to how much cocoa beans it grinds for the remainder of this quarter, to turn out its world-famous chocolate and other cocoa-based treats.
There are other reasons as well for the Ghanaian traders’ anxiety.
Ghana and neighboring Ivory Coast are the world’s biggest cocoa producers, and a 7% slump in cocoa prices this month alone could deal a blow to the economies of the two African states.
On its end, Barry Callebaut is the globe’s largest chocolatier, and Switzerland is the largest market for chocolates after Germany. Both countries are central to Europe’s crisis on COVID-19 immunizations, with Germany leading a group of at least 10 nations within the bloc that have paused the rollout of the AstraZeneca vaccine on reports of illness among some recipients. Switzerland, meanwhile, expressed skepticism about the vaccine even before the controversy, and might further delay its approval.
Put together, too much is at stake for the cocoa and chocolate trade, says Jack Scoville, crop analyst at Chicago’s Price Futures Group. He adds:
“Cocoa futures seem to be factoring in large supply against weaker demand at this time.”
“Demand should improve as COVID vaccinations get administered and as at least some governments around the world invest in fiscal stimulus on their economies.”
To the trade, that might be easier said than done.
COVID-19 is already having a noticeable impact on demand for chocolates, a luxury food product. Especially affected are premium chocolate products that depend on travel (airports and hotels), foodservice and at specialty boutiques, foodbusinessnews.net reported last month.
Godiva To Close All North American Stores
A further indication that all is not well: Belgian chocolatier Godiva’s decision to close all its 128 retail chocolate stores and cafes in North America by the end of this month.
This despite North American cocoa grinds rising by a surprising 7% in the fourth quarter of 2020 from a year earlier. Jeff Rasinski, analyst at Blommer Chocolate Co, however, explains that the increase may be more of a statistical anomaly than surging demand. To prove his point, North American grinds for all 2020 were down 3.5% from the previous year.
Fourth-quarter cocoa grinds in Europe, the largest chocolate-consuming region, were down 3.1% from a year earlier, while grinds in Asia were down 4.2%. For all of 2020, European grinds fell 3.9% while those in Asia slid 5%.
COVID-19 also has contributed to disarray on the production side of cocoa.
Reuters and others reported that about 100,000 tonnes of cocoa beans, or about a third of monthly deliveries, were backlogged at Ivory Coast cooperatives and farms as the country’s regulatory board suspended registration of beans to reduce stockpiles for export. Some buyers in Europe and the United States asked that deliveries scheduled for the fourth quarter of 2020 be delayed because export demand was lacking.
Adding to the challenges was the $400-per-tonne living income differential, or LID, implemented Oct. 1 (on the 2020-21 crop) by the Ivory Coast and Ghana, which together account for about 60% of global cocoa bean production. The LID, which is added to the sale price of cocoa beans in both countries, is intended to be passed on to poor West African farmers. The sustainability concept has broad support from the world’s major cocoa processors but failed to address the reality of the market—prices tend to fall when demand weakens.
Last month, Reuters reported that the Ivory Coast’s domestic cocoa association, GNI, had petitioned the government’s cocoa regulator to implement reforms to end the dominance of multinationals in handling cocoa exports. GNI said six companies—Barry Callebaut, Cargill, Ecom, Olam (OTC:OLMIY), Sucden and Touton—dominate exports from the Ivory Coast and that major chocolate makers tend to buy exclusively from them at the expense of the companies represented by GNI.
The International Cocoa Organization said last month that anticipation of a production surplus compounded with low levels of demand contributed to the decline seen since the start of this year in cocoa prices. On Wednesday, New York-traded cocoa futures hovered at $2,530 a tonne versus the November close of $3,008.
Ghana Reeling From COVID-19 Impact On Cocoa
In the case of Ghana, cocoa generates over 80% of its export revenues, which come from three primary commodities—gold, crude oil and cocoa exports. It is classified by UNCTAD as commodity dependent, making it vulnerable to sharp drops in commodity prices.
Since the COVID-19 pandemic began, demand for oil dropped precipitously due to a sudden reduction in industrial production, trade, travel, and movement of freight. Prices fell dramatically as a result.
Ghana is the second largest cocoa bean supplier globally, with an estimated 1 million Ghanaian smallholder farmers and their communities depending directly on cocoa for their livelihoods.
Revenues from the newly established, local oil and gas industry have had a profound impact on Ghana’s macroeconomy, even though oil and gas accounted for just 3.8% of Ghana’s GDP in 2018.
The only commodity that did well on Ghana’s main exports was gold. The country is the largest gold producer in Africa. Demand—and the price— of gold increased.
Ghana achieved strong economic growth in terms of real GDP in the 2000s and reached lower middle-income status in November 2010. Middle-income countries generally have a diversified economic structure but Ghana remains heavily dependent on primary commodity exports for foreign exchange earnings.
As a result, the impact of the fall in the price of oil and cocoa has been severe. Ghana’s credit rating was downgraded to B- in September 2020 and the International Monetary Fund approved the disbursement of $1 billion to improve the confidence of the country’s creditors. At the end of 2020, GDP growth was confirmed at 0.9%.
Beth Daley, editor and general manager at The Conversation, wrote in a blog last month about the impact of the pandemic on Ghana and its cocoa trade:
“The COVID-19 crisis hit Ghana and other commodity dependent economies through three mutually reinforcing impact channels: price channel, supply chain channel and financial channel.”
Cocoa Technicals: No Price Recovery On The Charts Yet
Investing.com’s Weekly Technical Indicator firmly calls for a “Strong Sell” on cocoa, with a Fibonacci support first at $2,539, then at $2,518 and later at $2,484.
Should the market, however, reverse trend into a breakout, then Fibonacci resistance will form first at $2,607, then $2,628 and later $2,661.
The pivot point between the two models will be $2,573.
As with all projections, we urge you to follow the calls but temper them with fundamentals—and moderation—whenever possible.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.