2017/18 season off to a flying start

by: Nadia Menkveld

The 2017/2018 season is underway for tropical commodities, with most getting off to a flying start. Cocoa bean grinding increased last month in Ivory Coast, while coffee is heading for an off-year – and hence a lower crop – in the new season. ABN AMRO foresees rising prices for both these commodities. Sugar prices, by contrast, will come under pressure from larger harvests, notably in Europe, China and India.

After concluding in our previous update that cocoa had bottomed out, we can now discern a clearly upward trend. In the past three months, the price of cocoa has risen 12% and is now above 2100 USD/t. However, the price of cocoa, despite this considerable jump, remains low compared to preceding seasons. At that time, there were still shortages in the market, while the most recent season (2016/2017) produced a clear surplus thanks to a record crop. Demand is certainly not to blame for the subdued prices: exports from the world’s largest cocoa producer, Ivory Coast, shot up about 20% in the 2016/2017 season. Cocoa bean grinding has also increased in Ivory Coast. For several years now, the government has been seeking to promote more local grinding activity by offering subsidies and tax cuts to businesses. And their efforts are paying off. After five years of expansion, Ivory Coast now processes the same number of tonnes as the Netherlands – another major cocoa-processing country. In 2016/2017 an estimated 545,000 tonnes of cocoa were ground by the Netherlands, closely followed by Ivory Coast with an estimated 540,000 tonnes. Ivory Coast has also gotten off to a good start this new season with 45,000 tonnes of cocoa beans in October: up 15% on the same period last year. And the country still has capacity for further expansion.

But cocoa bean grinding is not just on the rise in Ivory Coast. The same upward trend is visible in the rest of the world. In Asia, grinding accelerated 13% YOY in the third quarter of this year. And Europe saw an increase of 3% in the same period, lifting the grinding volume there to its highest level in six years. Grinding activity also rose in the US, but less than expected.

However, despite the higher demand, cocoa prices fell. This was due to the surplus resulting from the record crop in Ivory Coast. Yet, with the 2017/2018 season underway since October, all eyes are now on the future, with a particular focus on the two leading cocoa-producing countries: Ivory Coast and Ghana.

The chance of another record-breaking season is small as last season the weather conditions were ideal. Moreover, a growing number of trees are becoming relatively old and therefore bearing less fruit. In addition, Ivory Coast is currently reining in illegal cocoa production in its protected forest areas in order to prevent further deforestation. This government crackdown is to be completed within five years, but the process will be gradual and scrapped production capacity in protected areas will be replaced at other sites.

Higher demand and lower supply will push up prices in the coming period. Yet, cocoa stocks are still relatively high, making an upward price breakout unlikely.

But the signals do point to higher rather than lower prices. ABN AMRO expects a cocoa price of 2300 USD/t at year-end 2018.

The price of Robusta was depressed in the past month mainly due to the good harvest in Vietnam. Favourable weather conditions (dry and sunny) led to an excellent harvest in the world’s second-largest coffee-producing country and exports rose as well. This pushed down the Robusta price.

The reports from Brazil, the world’s biggest coffee producer, were less positive. Coffee exports there lagged behind expectations. Total exports until end of October were about 10% lower than in the same period last year. Several factors were responsible for this decline. One was the weather, which was not invariably favourable. Another was the damage caused by the notorious coffee borer beetle. The pesticide previously used to keep this harmful beetle in check is no longer permitted for health reasons. The ban on this pesticide opened the way for an outbreak of this pest. The result was a production slump in Brazil. Finally, due to the relatively low price, coffee farmers held onto their stocks in the hope of rising prices. Their hope proved vain: the coffee price remained low.

The 2017/2018 season ending in June is an off-year. This means that the harvest will be lower, while demand is expected to continue growing. Prices will rise as a result, but only to a limited extent as 2018/2019 will be an on-year with all the signs pointing to a record harvest in Brazil.

The 2016/2017 season presents a more balanced picture after the sugar shortage (and accompanying elevated prices) in 2015/2016. Higher production brought supply more in line with demand. India enjoyed better weather conditions than last year, leading to a larger sugar harvest and falling prices.

In the EU, the first harvest since deregulation will reach the market this winter. Freed from decades of EU regulation, many sugar beet farmers have stepped up their production. The EU sugar beet harvest is therefore expected to be larger than last year, with the European Commission forecasting a 20% higher output. The Netherlands will contribute to this increase, but the main driver of the higher crop yield will be the EU’s leading sugar beet producer, France, due to a larger planted area and higher yields.

In China, the world’s fifth-largest sugar producing country, the increased planted area has boosted sugar production. Moreover, China is engaged in a mechanisation drive to produce sugar more efficiently and profitably. This plan was unveiled after China announced sugar import permits would be halved to about a million tonnes and that extra import tariffs would be imposed. China thus hopes to give its own farmers better access to the domestic market. The move will also reduce demand from the world’s largest sugar importer.

Current prices are mainly driven by the supply outlook for the 2017/18 season. The ISO (International Sugar Organization) and the USDA (United States Department of Agriculture) recently issued revised forecasts. These organisations expect both demand and supply to grow, but with supply outpacing demand. The USDA foresees a record global crop of sugar, largely due to benign weather conditions in India and Thailand (joint production of about 40 million Mt). Another contributing factor is the expansion of the planted area in China and the EU.

The upshot is that the sugar price will come under considerable pressure in the coming period and is likely to decline. However, rising ethanol production in Brazil may ease some of this pressure. Drivers in Brazil with an FFV (Flex-Fuel-Vehicle) are increasingly opting for ethanol now that petrol prices have risen by 20% since July. In addition, the lower ethanol price may prompt Brazil to add more ethanol to its fuel mix. This would further increase demand for ethanol, but most likely not enough to cancel out the fall in the price of sugar resulting from the expected surplus.