Market Update January 2023 ''Cacao''

Macro and Forex

Us dollar: The three central banks we usually analyze the ECB, the BOE, and the FED—finally met market expectations in the first meeting of 2023 to discuss rate hikes. In the case of the US central bank, they hiked 0.25% to 4.5%–4.75%, proving right those who indicated that the pivot was coming. The slowdown in rate hikes by the Fed has meant that the dollar has been losing strength in recent months. And although the momentary good health of the country's labor market gave more room for further hikes, it is understood that the latest hike is more dovish than expected and may already be very close to the maximum rate. Inflation has been falling since its peak of 9.1% in June 2022, with a +6.5% in December. Core inflation is also showing signs of easing in recent months. Something that has allowed the Fed to slow down, even though they have been doing quantitative tightening since March 2022 and still have some way to go. Both the sale of bonds bought during the pandemic and the rate hikes are measures that directly impact the economy and must be taken with caution. Another aspect to bear in mind is the memory of the US inflationary problems in the 1970s, where the results of not being strict enough with interest rates ended up in an inflationary problem that lasted almost a decade. Speaking about the American currency, the beginning of February has halted the US dollar's decline, at least temporarily, because if we look at the euro/usd pair, it had lost more than 12% between November and January. So the trend was quite evident.

Euro: January was a good month for the euro, following the inertia of the end of 2022. The ECB's shift in perspective has aided in the support of the single currency, taking advantage of the FED's pause and the British currency's uncertainty. We have to remember that the European Central Bank took until July 2022 to start raising interest rates, while its American and British counterparts started earlier in the year. The ECB's speech talked about transitory inflation, which probably hid some fear of slowing down the recovery in Europe, and also took into account that the energy problem was greater than in other areas. This view has changed, and the Bank, led by Mrs. Christine Lagarde, is still willing to curb inflation by raising rates. 50 basis points at the February meeting and with a forecast to raise another 50 basis points in March as well. A statement of intent that has given support to the European currency. Inflation reached its temporary peak in October at +10.6% and ended at +8.5% in January, so there is still a lot of work to do. On the other hand, core inflation remains high. So this means that action has to be taken, it seems, at whatever price is necessary.

GBP: The pound improved slightly from the trend seen at the end of 2022, but has been quite a volatile month for the British currency. The economic figures remain mixed in the country, and it is not clear what to expect. Many people, including the Bank of England, already assumed that the UK would be in recession by Q4 2022. For now, the GDP data was positive in October, and in November, it grew by +0.1% compared to the previous month, when a contraction of -0.2% was expected. something that is obviously positive. On the other hand, BOE Governor Andrew Bailey said that the recession would be shallower than expected, sending a message of reassurance after raising rates by 0.5% as expected. Inflation continues to hold up in the UK, still in double digits at its latest reading in December 2022 (+10.5%), after peaking in October at +11.1%. Moreover, core inflation continues to struggle. Something that could lead to more rate hikes. The unemployment rate remained stable at 3.7% in its latest reading, providing some support for the pound. On a negative note, the S&P global PMI indices showed the services sector at a 24-month low, although manufacturing was better than expected. Both are still contracting. This put further downward pressure on the pound at the end of January.

Cocoa Production Countries

Ivory Coast

Cocoa arrivals at ports in the world’s top grower reached 1.540 million metric tons by the 29th of January since the start of the season on October 1, up 5.7% from the same period last year. The total grind from the start of the 2022–23 season in October stood at 58,554 metric tons of beans by the end of December, up +13.1% from the same period last year. Furthermore, the Ivory Coast will increase its domestic cocoa processing to 49% of total production beginning in October 2023, with the addition of several new plants, according to the head of the Coffee and Cocoa Council. Ivory Coast plans to build a new plant in San Pedro with a grinding capacity of 120,000 metric tons.

Ghana

Cocoa arrivals at ports in Ghana reached 440,403 metric tons by January 5 since the start of the season on October 1, up 54% from the same period last season. Cocoa production in Ghana is expected to reach 750,000 tonnes this season.

Other producing countries/regions:

Ecuador

Ecuador has signed a free trade deal with China, which is expected to boost exports for the country’s industrial sector.

Cameroon

Cameroon’s government approved a new tax on cocoa exports in 2023. The unprocessed cocoa beans being exported will be subject to a tax rate of 10%.

Nigeria

Nigeria’s December cocoa exports decrease a 73% due to poor weather and recent disease outbreaks. Nigeria could lose around 20,000 tonnes of its main crop due to different issues. Nigeria is the fifth largest cocoa exporter in the world with around 27,000 tonnes, this would mean a 7.4% loss.

Brazil – No further news available

Asia – No further news available

Demand Insight – World Cocoa Grinding

4Q22 Cocoa processing figures for the 4Q22 recorded slightly better figures than the previous year, 930,529 vs 929,949, up +0.06% from the same quarter last year. Principally the good number in Ivory Coast leads this increase. The grindings in Ivory Coast continue their increasing trend with a +8.4% YoY incentivized by the extra production cost in other areas such as Europe that could have relocated the grinding capacity. The increase in Ivory Coast’s grindings is evident; they grew 2022 + by 15.6% compared to 2021. The Ivory Coast’s government wants to increase its grinding capacity to 49% of its production. Besides, the slowdown has shown clearly in Europe and North American regions. In Europe, we see a decrease of -1.7% YoY and the fall was very similar in Q3 and Q4, probably due to high production costs. The drop in the second semester of the year offsets the good start of 2022 and ends the year with an increase of +0.72% In North America, we continue to see the same negative trends that had been seen in the previous quarter with less grinding capacity and lees companies showing their grinding results. North America area ends the year with a decrease of -5.13% Asia slightly slowed down the good year in 4Q22 with -0.2% YoY and ended the year with a total growth of +3.09% compared to 2021. Certainly, even with the slight decrease in the last quarter, there were the three best?grindings in their history. The drop was principally led by the bad numbers of Malaysia grindings with a drop of 7.7%.?

Figures/data:

- Europe: -1.7% YoY (Worse than market expectations)

- North America: -8.12% YoY (Worse than market expectation)

- Asia: -0.2% YoY (In line with market expectations)

- Ivory Coast: +8,4% YoY (Above expectations)

- Brazil: +6,05%

Weather News

Early this month began with no rain in most of Ivory Coast’s cocoa regions, raising fears of a prolonged dry spell which could weigh on the outlook of the April to September mid-crop. Sparse rainfall and high temperature continue for almost the whole month. Even so, the Harmattan has not been exceptionally strong this year and the yields will probably remain resilient. Fortunately, at the end of the month, above-average rain in most of Ivory Coast’s cocoa regions last week will boost April to September mid-crop after weeks of dry weather. Farmers rejoiced on Monday after showers in parts of the country moistened parched crops. Rain would improve soil moisture content, and help small pods to develop.

Market Overview

January has been an almost constant struggle for the London market to break through the ￡2,010 - ￡2,020 barrier in the second position. It was hoped that the grindings would put some light on the market and finally some sort of clearer direction for the price, but this has not really been the case. If we look at the chart since November we find ourselves in a clear sideways range, which so far has not been broken. The consumption data so far had been quite positive at least in terms of sales for a good part of the confection industry (margins and costs are another matter) and also reflected in the cocoa bean grind figures that had been growing during the year 2022. In the end, Q4 22 grindings were somewhat worse than expected, leaving a bittersweet taste of the year. The slowdown in the last quarter of the year was evident, with no growth in Q4 compared to last year in the sum of the main regions. Despite that, we ended 2022 with a total increase of +2.54% vs 2021. Despite this possible slowdown on the trend in the last quarter, many companies believe that consumption will continue to increase in 2023, while global crop growth may not do so at the same level, leaving us with a balance of the current crop with an expected deficit ( Or so some researchers say). Big confectionery multinationals have given predictions of sales growth for 2023 and at the moment there is still activity in the intermediate products industry, which could be a sign of a healthy market. Ratios remain solid, and although industry coverage has decreased from 10 months to 6 months, it seems to be more about a change in purchasing strategies due to increased uncertainty than a fall in consumption. Maybe this turning into more short-term and spot purchases has helped the market to invert the prices and have the backwardation we have seen for many months now. Regarding production countries, Ghana is of particular concern. As we have already mentioned, a certain amount of the crop is expected to be transferred (smuggled) to other countries during the harvest, especially to the Ivory Coast. The lack of access to fertilizers, the country's economic problems, and the loss of crop yields are other aspects that make many not believe that Ghana will produce 750,000 tonnes during the 22/23 harvest as expected by the Ghana Cocoa Board. In principle, Ecuador is expected to continue on its path of growth, while Cameroon and Nigeria could remain close to last year's crop in terms of output. Nigeria has its general elections at the end of February. As for the rains in West Africa, they have started to appear in the last few weeks, which relieves some of the possible tension about the mid-crop. As we said the grindings figures did not change the direction of the London market in January, at least not for more than a couple of sessions. But it probably helped to lighten the spread between March 23 and May 23, a change that had already started in the market previously, but perhaps it was accelerated by it. Although it is not the only factor influencing the market structure. What is true is that by putting the first position in contango, even though the rest of the structure remained in backwardation, the feeling of tension in the market relaxed slightly. We will see if the market continues to try to “hammer” it's ceiling until it breaks through or if it gives up and gives some windows of opportunity to the industry that is eager to buy.

Cocoa Chart ICE London – May 2023 (K23)

The sideways channel of the market since mid-November has been quite evident, and except for the momentary dip in mid-December, coinciding with the disappearance of the Dec 22 position. The rest of the time the market has moved in a range of ￡73 between the lowest close at ￡1945 and the highest close at ￡2018. Taking as a reference the second London position on the continuum. This sideways movement has been more accentuated during the end of December and during January, where if we exclude the momentary dip after the publication of the grindings, the range has narrowed to ￡48. A movement in which during many sessions alternated red and green sessions left the market in the same place, as can be seen in the graph. In spite of that fact, the market seems to be constantly trying to break through the resistance by constantly hitting ￡2,000 at first, then ￡2,010 and finally closing at ￡2,018. Gaining ground very slowly, but without enough strength to break it with momentum enough and follow the path. Regarding the lower part of the range, we could say the same, but perhaps the market has had more of a feeling of support. The worse-than-expected grindings were a fact able to prove wrong this theory but it ended in a very quick drop followed by a rebound that could have strengthened the support more than find a weakness.

Cocoa Products Overview

No significant changes in the ratios in the past month. Liquor and butter prices continue to increase while powder prices have started to decline a bit. However, the cake prices remain solid and give support to the powder prices.

Liquor: Liquor ratios continue to be well supported. They have lost a couple of points in the past month but with a higher market price, the outright price continues to be historically at a high level.

Butter: We have seen how butter continues with its regular demand and although it has not risen significantly, it does maintain its bullish tone in the ratio.

Solids (Cake/Powder): Low demand in powder prices could decrease the outright price in the coming months. Powder price seems stagnant but cake prices in origin continue to be at sustained levels for nearby positions that will support the powder prices.?