Article: “Covid has been catastrophic for cocoa demand”

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.

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.