Analysis: Indonesia’s Cup of Cocoa Woes Could Cheer World Market

By Lewa Pardomuan and Michael Taylor

SINGAPORE/JAKARTA (Reuters) – A plunge in Indonesia’s cocoa exports spotlights a flagging battle against disease and adverse weather, but the country’s supply disruptions could allay fears of another global surplus and stem a seven-month slide in prices.

Although the outlook for world grindings may be clouded by the threat of recession, shrinking output in third-largest cocoa producer Indonesia will help balance the market in the next crop year after supply exceeded demand by 450,000 tons this year.

“Indonesia is clearly the one bullish point that we expect in the cocoa market,” said Kona Haque, a commodity strategist at Macquarie Bank in London.

“Everything else right now is slightly on the bearish side, including grindings demand, which is probably going to be weaker than expected, and equally West African production could be higher than expected.”

Indonesia launched a $350 million program in 2009 to boost production to more than 600,000 tons within 4 to 5 years, but it has yet to show results, with bad weather, growers’ failure to follow advice on planting techniques and mismanagement working against the campaign.

Instead of rising, output is likely to plunge more than 30 percent to around 400,000 tons this year, but that will be enough to meet demand from the Indonesia’s thriving grinding sector.

“DIABOLICAL” WET WEATHER

Wet weather wreaked havoc on the crop this year and brought back the Vascular-streak Dieback (VSD) disease to plantations across the main growing island of Sulawesi, killing trees and curbing exports since at least March.

“The fact that Indonesia is struggling is a very supportive factor. VSD is a killer. There is no cure for it, you can’t spray — the only thing they can do is cut down the trees and re-plant,” said Gary Mead, editor at WorldCrops.

“We might be in a structural period where Indonesia just gets a lot of rainfall for the next few years, and that would be pretty diabolical for the cocoa sector.”

The International Cocoa Organization expects the cocoa market to be in balance or possibly see a small surplus in the next crop year to September 2012 — bucking the market consensus view of a small deficit.

The ICCO estimated a surplus of 325,000 tons in the crop year ending this month — a bearish factor which caused cocoa futures to fall from a 32-year high at $3,775 a ton in March to current levels around $2,700.

Commodity trader Olam International estimated surplus in the current year to be as high as 450,000 tons. [ID:nL3E7KQ0L6]

But supply constraints in Indonesia, which may last through next year if erratic weather persists, could force traditional buyers such as Malaysia, the United States and Brazil to turn to West Africa, where beans are plentiful after a bumper crop, and ease supply there.

Indonesia’s falling output had contributed to a global supply shortage in the crop year to September 2009.

Cocoa exports from Sulawesi tumbled 76.7 percent in August to 8,421.50 tons on the year, and the country’s total shipments could fall 40 percent to 200,000 tons in 2011, their lowest in at least seven years.

VSD is the latest in a series of pest and disease risks Indonesia has battled for years to eradicate, among them the cocoa pod borer, which has persisted since the 1980s.

The revitalization program launched two years ago aimed to fix the problem by handing out free fertilizer to boost the productivity of cocoa trees over an area of 145,000 hectares, the replanting of old trees and the production of better seeds.

“The general perception is this program has made the parties in the middle richer — I mean those who are contracted to provide seeds and so on. The money hasn’t gone down to the farmers,” said an exporter in Makassar, the provincial capital of South Sulawesi.

“There’s no news of an increase in production.”

Government officials said the program was on track despite minor glitches such as farmers mishandling the seeds or young cocoa trees which are to be planted to replace old ones.

“The program is still going on and I heard it will be extended to 2014,” said Soetanto Abdoellah, research head at the state-sponsored Indonesian Coffee and Cocoa Research Institute.

“We also focus on quality improvement. We have started working on bean quality improvement, involving many farmers.”

About 90 percent of Indonesian cocoa growers are smallholders, which has crimped expansion for decades.

INDONESIAN GRINDERS CHASE LOCAL BEANS

The main crop in Sulawesi, which was badly hit by disease, is over. The market has turned its attention to the smaller crop due to start next month and so far progressing smoothly.

Farmers and grinders hope the heavy rain of the dreaded La Nina weather phenomenon does not return.

Indonesian grinders are forecast to process 400,000 tons of beans into chocolate ingredients in 2012, up 43 percent from this year’s 280,000 tons, to meet growing demand from consumers in Asia at a time when demand in Europe and the United States may falter.

Indonesia is also attracting companies such as U.S. giant Cargill , which plans to invest $113 million to set up a cocoa grinding plant in Sulawesi.

“Cocoa bean exports from Indonesia will tend to fall because of rising domestic demand estimated at more than 400,000 tons in 2012,” said Piter Jasman, chairman of the Indonesian Cocoa Industry Association.

He expected strong consumption to help prices stabilize at $3,000 a ton, and production to eventually reach 600,000 tons a year.

Global cocoa consumption has been growing at about 1.5 percent each year, analysts say, with total global net production estimated at 3.736 million tons and global grindings at 3.829 million for the 2011-2012 season.

So the supply worries won’t go away any time soon.

“The industry has been plagued with concerns about disease and the quality of the crop,” said Abah Ofon, commodities analyst at Standard Chartered Bank in Singapore. “That is going to put pressure on supply in the next harvest now.”

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