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Article: “Covid has been catastrophic for cocoa demand”
25 August 2020
Covid-19 has yet to have much of an impact on African cocoa
supplies. However, the global market has already felt its effect on
demand, with the consumption outlook for the sector, set to be
disastrous.
IHS spoke to Tedd George, Chief Narrative Officer at Kleos
Advisory UK, on how Africa has dealt with the pandemic during H1
and what lies ahead in H2 in terms of cocoa demand and prices. He
also discusses the possible impact of the upcoming elections in
Ivory Coast.
This is the first of several parts from this interview. The
second part, which will cover Government support, Farmgate prices
and the Living Income Differential, will be published
soon.
Q: How has Covid impacted cocoa in West Africa during
H1?
In terms of cocoa supplies, Covid has had a limited impact. The
outbreak first hit West Africa towards the end of the main crop, so
around April is when it first started to take grip there. So, the
main crop was already over and the main crop was good. In fact, it
was possibly a record. So that means it didn't have so much of an
impact on prices. If it had come in December for example, when
you're getting deliveries, I think it would have definitely led to
a spike in prices. And it doesn't appear to have impacted too badly
on the midcrop either.
Q: How does it compare to other pandemics Africa has
seen?
Yes, I think it is worth making a comparison with what happened
during Ebola and what happened during the brief civil war Ivory
Coast had back in 2011. During Ebola, there was almost no
disruption to the crop. I think the bottom line to make here is
that everyone depends on the cocoa flowing, particularly in Ivory
Coast, but it goes for Ghana as well. Everyone depends on the cocoa
flowing, so they might be fighting, but they still want a piece of
the action, so they're not going to stop their cocoa flowing.
But that didn't happen in 2011. What ended up happening was that
more cocoa ended up being smuggled to Ghana and that's why Ghana
had that bumper year in 2011-12, with a lot of that cocoa being
from Ivory Coast. So, the following year it went back. But it
didn't stop the cocoa flowing.
And I think we are seeing the same here now with Covid. They
don't really tend to do lockdowns in Africa, more so curfews. They
recognise that literally everyone has to leave the house to make a
living, so there is no point in imposing a lockdown that you can't
enforce. What they will tend to do is have a curfew from 7/8pm at
night and prevent any mixing at night particularly any type of
socialising etc, which is one of the big ways in which it spreads.
Therefore, we're going to have to accept that there will be a
spread amongst those who carry on with their business.
Q: How has Covid impacted cocoa demand?
Well, yes, exactly. Though it hasn't had much of an impact on
the cocoa flows, which have been good. It's about the bigger
picture. And the bigger picture for the first time in quite a long
time is all about demand. And it has been catastrophic for demand.
Confectionary demand is down, meaning cocoa demand is down. Now, at
first that might seem a bit odd because you might think, 'hold on,
the one thing that people stock up on is chocolate and wine' and
the things is, people are and the price point for chocolate is the
same as before.
But the difference is the use of chocolate and cocoa in
restaurants. All these high-end restaurants that buy cocoa for
their menu has gone. Nobody is buying or consuming any of that. And
then the amount of chocolate that is bought at airports, that has
gone straight down too. So, we have seen a drop in confectionary
demand of approx. 5-10% and that has definitely had an impact on
prices. That for me, is the big concern about cocoa prices
generally.
Whatever discussions there are about the possible risks that
could push them up in the coming months this big question about
global demand is only going to get worse. You're already seeing in
the UK, major supermarkets and restaurants having
redundancies/closures, which is no surprises. We are going to see a
shocking amount of redundancies in the next 6 months all around the
world and that is all going to impact demand. And chocolate/cocoa
is a luxury item whether you like it or not.
Q: It has been a crazy year for cocoa prices
already…
Crazy year for prices for sure. But I think it's worth
remembering that they are still within the band that they have been
trading in probably since 2016, let's say between
GBP1,500-2,000/tonne. They went down recently a bit, then went up
again and then a bit down. So, they are still very much within that
band. I think the interesting thing is, as we go into approaching
the main crop, we have these two balancing scenarios. One is a very
bullish scenario for prices. First off, we expect them to go up in
September, they always do as you get a drop in supplies and there
is always concern about what is happening with the new crop.
There's also not as much buying activity and sure enough the prices
edge up. But then you have the elections coming up…
Q: Yes, what impact could the upcoming elections in
Ivory Coast have?
Well this is a big uncertainty. Alassane Ouattara is going to
stand again. If you look at it from every angle, that is the
logical choice as you can't just summon up an interesting new
candidate in just 3 months particularly in somewhere like Ivory
Coast. There have been some protests, but he'll probably go
through. But the fact that he is standing again, and that
uncertainty is definitely going to push up prices and the
possibility that you could have some localised conflict too. In
addition, potentially some of the parties opposed to Ouattara in
cocoa growing areas could impose blockades or blocking
roads/blocking supplies. So that's one thing that could push up the
prices too.
Q: So, going into H2, is it Covid or global demand that
will impact cocoa prices the most?
I mean, they (West Africa) are still in the first wave, but
let's say it really does get serious and find that it is much worse
than anticipated and it is having this really bad impact, then yes,
that could disrupt supplies. So, all those things together are the
bullish scenario and you could see prices rise. But I would say
that set against that, which is much more concern for me, is global
demand/consumption. It's just not there. And if anything, it's just
going to get weaker. You know when people lose their jobs on a
large scale, cocoa consumption goes down. It's just as simple as
that.
I mean, we might go into this bizarre situation where cocoa
companies start putting in more cocoa in chocolate, just to use it
up! You might find chocolate that used to have 4% cocoa will go up
to 8% or something like that. It certainly might be the case that
if prices go down to a certain level the smart cocoa companies will
buy and stock up. But you can only stock up so far.
So, for me, overall. My perspective for the second half of the
year: Cocoa prices are unlikely to strengthen much more to where
they are now with the possibility that they could fall quite a bit
from where they are.
I would certainly expect some jitteriness with prices, let's say
up until the end of October with the elections. You could see some
spikes. But certainly, looking at the trend. I think we can expect
to see price weakness for the second half of the year.
Q: So, the 2020/21 cocoa season, are we saying it's
going to be bleak?
Well, the run up to the main 2020/21 crop is certainly looking
good. There is no evidence I have come across yet that it had been
severely disrupted by Covid. I haven't heard any concerns here from
the perspective of weather or inputs. But the big risk still
remains if there is a major dispute in Ivory Coast over the
election, whatever the outcome is there. That could cause severe
disruption. And even if it doesn't disrupt cocoa that much it could
be enough to cause market jitters to push up the prices. But
obviously if Covid were to take a serious grip on the population
and force real serious lockdown measures, again that could really
disrupt the supply and harvesting of cocoa.
But I think the overwhelming concern going into the 2020/21
season is global demand which is going to be weak. It's certainly
not growing like it was before. It's going to be flat; it could
even be falling slightly. And that is not good for cocoa
prices.
What that basically means is that we have generally quite a good
level of production of cocoa, OK functioning cocoa system, but now
we're entering the crunch point. In the second half of this year
there's a lot of chickens that are going to come home to roost.