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Crop woes in Ivory Coast leads to chocolate supply worries

Bloomberg News

LONDON -- Cocoa is heading for its best quarter since 2009 as dry weather and crop delays in West Africa, the main growing region, send prices toward a two-year high and raise costs for chocolate makers.

Demand will exceed output by 119,000 metric tons in the 12 months starting in October, the first shortage in four years, according to Macquarie Group Ltd. Prices will enter a bull market, rising 5.8 percent to 1,750 pounds ($2,718) a ton in London by the end of 2013, the highest since September 2011, according to the median of nine estimates from traders surveyed by Bloomberg. Hedge fund bets on higher prices in New York are near a five-year high.

The main-crop harvest in Ivory Coast, the top producer, may be a month later than usual and MDA Weather Services says rain in southern growing areas has been more than 25 percent below normal. World output will drop 1.2 percent to a four-year low at 3.94 million tons in 2013-14, with 1.42 million tons from Ivory Coast, Macquarie estimates. The world confectionery market is worth $114 billion, and Commodities Risk Analysis estimates the industry uses as much as 75 percent global cocoa supplies.

"The dry period did start earlier than normal," said Jonathan Parkman, co-head of agriculture in London at Marex Spectron Group Ltd., who has followed the cocoa market for more than 30 years. "To get the market to come down, we will need to see better weather than we've seen."

Cocoa rose 13 percent since the end of June on NYSE Liffe in London to 1,654 pounds a ton, set for the best quarter since September 2009. The Standard & Poor's GSCI gauge of 24 commodities gained 5.6 percent in the third quarter as the MSCI All-Country World Index of shares rose 4.9 percent. Treasuries lost 0.7 percent, the Bloomberg U.S. Treasury Bond Index shows.

London cocoa jumped 19.2 percent since March, with New York futures entering a bull market on Aug. 7 with a gain of 20 percent from the 14-month closing low on March 6. Cotton is the only other commodity in the S&P GSCI Agricultural Index in a bull market.

Money managers increased bets on rising prices in London for five consecutive weeks as of Aug. 6, with net-long positions reaching 46,601 contracts, the most since October, NYSE Liffe data show. Bullish wagers on ICE Futures U.S. in New York jumped 41 percent in the past four weeks to 44,658 contracts.

Ivory Coast harvests cocoa twice annually, with 70 percent of production supplied by the larger main crop and the rest by the mid-crop. Output in the 2013-14 season starting Oct. 1 will fall 2.4 percent from a year earlier, Macquarie says.

Dry weather in April and May slowed emergence of pods for the main crop, said Kevin Marcus, the founder of Marcus Weather in Passaic, N.J. More moisture is needed now to fill those pods with beans, increase their size and improve their quality. A large mid-crop meant trees used their resources to keep pods hanging, spurring further delays in the development of the next crop, he said.

A rally in cocoa may be capped as slowing economies dent chocolate demand. Chocolate sales in Western Europe may expand as little as 0.5 percent this year, compared with 1.5 percent last year, said Francisco Redruello, a senior food analyst at Euromonitor International Ltd. The London-based researcher previously forecast a 1.3 percent gain.

Cocoa processing in Europe from April to June fell 8.5 percent from the first quarter, data from the European Cocoa Association in Brussels showed. Archer-Daniels-Midland Co., based in Decatur, Ill., reported a loss of $28 million in its unit that includes cocoa in the six months to June 30 from a profit of $211 million in the same period a year earlier.

Price gains also may be limited as three years of surpluses mean world stockpiles at the end of September will be 1.98 million tons, equal to half a year's global output, Macquarie estimates. That would be the largest inventory since at least 1960, International Cocoa Organization data show.

Slower sales in the second half of the year may boost prices as Ivory Coast already sold most of its next crop, said Kona Haque, an analyst at Macquarie in London. About 1.05 million tons were sold by the end of July, 74 percent of the annual output forecast by Macquarie. A new marketing system instituted last year means most beans are auctioned from April to June instead of September to November, during the harvest, said Judy Ganes-Chase, president of J. Ganes Consulting in Panama City, Panama.

Nestle SA, the Vevey, Switzerland-based maker of Kit Kat and Crunch bars, said Aug. 8 that profit margins fell in the six months ended June 30 in its confectionery unit amid rising competition and increased spending on marketing in Latin America. Zurich-based Barry Callebaut, the world's largest maker of bulk chocolate, said in a statement July 4 that sales in local currencies fell about 1.3 percent in the nine months through May 31, compared with a year earlier.

Cocoa accounts for about 10 percent of the average price of a chocolate bar, the ICCO estimates. One ton of cocoa makes about 7,250 chocolate bars of 100-grams (3.5 ounces) each, according to Commodity Risk Analysis, a researcher based in Bethlehem, Penn. Macquarie's forecast for a shortage of 119,000 tons in the 2013-14 season is equal to the amount processed in North America in three months.