Cocoa, coffee, sugar prices move up, tea declines: Moin Siddiqi presents his annual review of Africa's soft commodities, focusing on cocoa, coffee, sugar and tea. Prices have generally tended to move upwards, except in the case of tea in which chronic oversupply is driving down earnings.

Market fundamentals have generally remained favourable to African farmers as the prices of cash crops like coffee, cocoa, tea and sugar have risen in the past three years. About one-third of sub-Saharan Africa's non-fuel exports comprises of coffee and cocoa.

Thanks to strong demand on the back of rising consumption, as well as reports of inventory rundowns and less over-production, the price of these commodities has remained in the most part buoyant. Robusta coffee surged in value by more than four-fifths between 2004 and 2006 and sugar and tea recorded price rises of 107% and 26%, respectively, during the same period. Meanwhile, the cocoa price rose a more modest 3%, according to the World Bank database.

Agricultural commodities are vulnerable to specific geographical and climatic factors. The 'El Nino' event of 1997/98 had a negative impact on some regions--coffee harvests fell by 11% in South America and 22% in Africa.

This unusual weather pattern brings unseasonable cool waters to the western Pacific and heavy rainfalls and floods in the eastern Pacific Ocean, while drought and spontaneous bush fires become more common in Africa and Southeast Asia. According to the World Meteorological Organisation, the current El Nino event, developing since July 2006, is predicted to have less severe consequences.

Speculative movements also affect the commodity markets in much the same way as investments in foreign exchange and bonds and equity markets can impact price adjustments. But agricultural commodities are acquiring a newfound respectability with institutional investors and hedge funds. That, in turn, should see soft commodities attracting funds as portfolios are re-adjusted after the recent weak performance of crude oil and metals.

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Barclays Capital, the UK investment bank, says: "This type of allocation would suggest shifting positions from sub-sectors highly correlated with the economic cycle--such as base metals--to sectors where correlation has been historically low as in most agricultural markets."

It estimates that $50bn could flow into the commodities sector by 2008--on top of $80bn-$100bn already invested in Europe's agricultural commodity futures. The latter trades in grains, oilseed, sugar, coffee and cocoa futures and options contracts in London and Paris.

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Cocoa

In crop year 2005/06, total world production of cocoa beans was estimated by the International Cocoa Organisation (ICCO) at a record 3.592m tonnes (m/t), up 6.2% on the previous season. Global grindings, a barometer of worldwide usage, stood at 3.476m/t. That, in turn, caused a production surplus, allowing for 1% bean weight-loss, of 80,000t, compared with a deficit of 12,000t during the 2004/05 season.

Once again, sub-Saharan Africa has reinforced its status as the No.1 cocoa belt region, accounting for 72% of the global harvest or 2.577m/t, led by Cote d'Ivoire--the world's top producer (see Table, right).

By contrast, the Asia-Oceania and Americas regions contributed 16% and 12%, respectively, of global supply. The end-of-season stocks, as at 30 September 2006, were 1.767m/t, representing a higher stocks/use ratio of 51%, or six months of annual consumption.

Fortis Bank, in its January commodities report, projected a supply deficit in 2006/07, forecasting total net cocoa output falling to 3.432m/t and global grindings rising to 3.563m/t. It notes: "If our assessment is correct then this implies a negative balance of 131,000t for the October 2006 to September 2007 year."

With stocks for 2006/07 estimated to be 1.688m/t, this implies a stocks-to-grinding ratio of 47%, 5% lower than the 2005/06 season. Fortis believes that future consumption growth should exceed the current 2.2% a year trend over the past decade. Consequently, total grindings could rise to 3.679m/t in the 2007/08 season versus world net output of 3.707m/t resulting in a modest 28,000t surplus.

The political instability in Cote d'Ivoire has not affected harvesting. The ICCO forecasts the Ivorian new crop at 1.4m/t--40% of the world's total. Its installed grinding capacity stands at 350,000t, a quarter of the country's output. Meanwhile, Ghana, the world's second-biggest producer, is aiming to expand output to 1m/t and achieve a processing capacity of 50% within three years. The Ghana Cocoa Board expects a 2006/07 crop of 700,000t, down 5.4% on last year's record harvest of 740,000t. Farmers receive higher farmgate prices compared to Ivorian growers.

Nigeria expects its annual cocoa output to reach 600,000t by 2008 through an industry revitalisation programme that would lift production up from the current maximum of 210,000t. But industry experts warn that obsolete techniques, ageing trees and a lack of crop chemicals may hinder the government's ambitious goal.

The ICCO pegs the 2006/07 crop at 186,000t. The five southwest states (Ogun, Ondo, Osun, Oyo and Ekiti) account for about three-quarters of Nigerian crop. Ondo is the largest cocoa belt--contributing 40% of annual output.

Africa's fourth-biggest grower, Cameroon, plans to boost output to 200,000t by 2016 by providing training to farmers, revamping old farms and eradicating crop disease.

Jerome Mvondo, general manager of Cocoa Development Authority, known as 'Sodecao' said: "Sodecao intends to put in place a more vigorous, rigorous, coherent, committed and efficient action plan to enhance cocoa production in Cameroon."

The ICCO projects Cameroonian production at 182,000t by 2010/11. Sodecao is trying to increase local processing capacity. "From cocoa we can produce chocolate, soap, cosmetic products, alcohol, liquor, pharmaceutical products, cheese and fertiliser," says Mvondo.

In East Africa, Uganda sees cocoa as part of an export diversification strategy--which last year netted $11.6m from just a 7,350t harvest. John Muwanga, national coordinator of the Cocoa Development Project, said: "Although the industry is still in its infancy, it has been growing steadily with more farmers and investors. It has potential for further growth based on investment in processing and value addition."

Uganda's cocoa exports are forecast to reach 13,350t by 2009, earning the country, better known for its coffee industry, more than $20m. The Bundibugyo region produces three-fifths of the country's total crop, and Uganda is among 12 global organic cocoa exporters. Certified organic cocoa attracts a 15%-25% premium on global markets.

Coffee

World production in crop year 2006/07 (April-March) is estimated at 121.57m bags, an increase of 11% over the previous season, while consumption is forecast at 116m bags, according to the International Coffee Organisation (IOC).

The top five producers are Brazil (42.51m bags), Colombia (11.6m bags), Vietnam (15m bags), Indonesia (6.85m bags) and Ethiopia (5.5m bags). The main coffee-importing nations are the US (20.76m bags), Germany (8.35m bags), Japan (7.22m bags), France (5.05m bags) and Italy (4.36m bags).

Total exports in 2006 rose by 4.5% to 91.08m bags. Finer Arabica beans, used to produce higher quality 'gourmet' coffee blends, account for two-thirds of global supplies, or 79.38m bags. Robusta, used for making instant coffee and lower quality blends, makes up the balance.

Global inventories could fall to 43m bags, their smallest since 1999, as exporting countries try to satisfy a buoyant demand. Coffee is the second-most traded commodity, after crude oil.

Different estimates are made by the US Department of Agriculture (USDA). It pegs 2006/07 production and consumption at 128.6m and 119m bags respectively, resulting in an even bigger 9.6m bags surplus. Total exports are estimated at 95.98m bags, up 8.5m bags on 2005/06 season.

The industry could witness a hefty supply deficit this year, according to the ICO. The 2007/08 crop is forecast at between 109m and 112m bags undermined by smaller Brazilian harvest and consumption rising to about 118m-120m bags.

That would leave a deficit of 8m to 9m bags. Projections for the new Brazilian crop are 31-32m bags. The IOC warns: "Even if production in other countries were to increase during crop year 2007/08, it would not be sufficient to offset the shortfall in Brazilian production." Thus, high prices may persist through 2007, with tight world supplies and depleting stocks.

Nestor Osorio, chief executive of the IOC, said: "In considering the outlook for coffee I should like to emphasise the importance of stock levels in importing countries as a variable closely related to price movements."

Ethiopia, Africa's No.1 producer, plans to boost production by 21% to 400,000t in 2008, up from 330,000t in the current season. Uganda is expecting to harvest 2.6m and 3m bags, respectively, this year and next. It exports coffee in bean form, mainly to the EU, and earned $173m in 2005. The Uganda Coffee Development Authority reckons exports could total 2.4m bags in the season ending 30 September, 2007, a 20% rise from 2005/06 thanks to fine weather and the maturing of trees planted four years ago. Robusta comprises 70% of Ugandan exports.

Other African growers also report production increases. The Kenyan crop should reach 55,000t this year, up from 48,000t in 2006, according to the Coffee Board of Kenya, albeit down from a peak of 130,000t in 1987/88. Cameroon's coffee exports surged 12% to 40,756t in 2005/06 and Ivorian 2007 crop is estimated at 110,000t.

Last year, Rwandan output surged 23.5% to 21,000t, but fell short of its 26,000t target because of insufficient rains. Export earnings fell to $46m from an initial projection of $50m, according to Ocircafe, the coffee industry regulator.

Within the global market, Africa's share in the coffee trade has fallen from 27% in the 1980s to just 13% today, reflecting lower investment, declining productivity and poor farm maintenance.

Robert Nsibirwa, executive director of the East African Fine Coffee Association, explains: "Civil strife in coffee producing Angola, Cote d'Ivoire and Burundi as well as low technology in the rest of the 10 African coffee-producing countries were responsible for the decline in production." He added: "Because of the support Vietnamese coffee farmers are receiving from their government, the country's average production ranges between 1,500kg and 2,000 kg/hectare compared with 450kg and 600kg/hectare in Africa."

But Africa does have the potential to expand total capacity in coming years, contingent on efficient technologies, higher crop yields varieties being used underpinned by improved husbandry practices, as well as active government support.

The Inter-African Coffee Organisation (IACO) has set targets for the continent of 23.5m and 33.5m bags/year, respectively, by 2012 and 2016.

Josefa Sacko, secretary-general of the IACO, said: "Our objective is to identify problems in each country, draw a new plan and set an objective that would enable the 25 African producer-nations to produce annually an aggregate 23.5m bags within the next five years." Burundi, Ethiopia, Rwanda, Tanzania and Uganda are heavily reliant on coffee exports, with coffee accounting for a significant share of their GDP.

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Sugar

Global production in 2005/06 season (ended 30 September) was estimated at 152.47m/t raw value, versus consumption of 149.76m/t. That left a small surplus of 2.71m/t. The stocks-to-use ratio rose to well above the traditional minimum of 30%. Last year, raw sugar price averaged $0.14.77 cents per pound (c/lb), up from 9.89c/lb in 2005. Africa produces about 7-10% of the total global sugar harvest, or 10-14m/t per year.

The major growers are South Africa, Egypt, Sudan, Mauritius and Swaziland, in that order. The region's sugar consumption has grown by 1m/t in the past four years. South Africa (Africa's largest grower) harvests about 3m/t a year.

This season should witness bumper harvests in key producing countries (India, Brazil and China), thus a bigger surplus. The International Sugar Organisation (ISO) expects a record global crop 160.203m/t (raw value) against consumption of 153.008m/t, yielding a 7.195m/t surplus for the year.

FO Litch, the German-based commodities analyst and London traders Czarnikow Sugar, have both raised their expectations for a supply surplus in 2006/07. The former projects global output at 161.3m/t with aggregate demand rising to 154.4m/t. The report stated: "Taking into account the allowance of 1m/t that we make for unrecorded disappearance, we are today forecasting a surplus of 5.9m/t in 2006/07, up from 5.4m/t projected in November."

FO Licht noted: "It is clear that global availability is more than ample for the new season." It projected a 160.6m/t sugar crop thanks to "almost ideal weather conditions around the globe" and added "surplus stocks, built up in 2006/07, will continue to overhang the market." This season's ending stocks are estimated at 72.6m/t, up 13.5% on the previous season. Raw sugar prices may remain weak this year and next. Morgan Stanley, the US investment bank, reckons that supply/demand fundamentals indicate prices should average under 10c/lb until the 2009/10 season. "Specifically, even though production decisions are distorted by policies designed to protect domestic sugar producers, we find that an increase in the world sugar price leads to an increase in production, albeit with a two-year lag, likely reflecting the physiology of the sugarcane crop," it explained. Sugar prices could benefit from future biofuel demand as sugarcane is an essential raw material.

Sugar is also the main feedstock for the production of ethanol, used as a motor fuel in Brazil and a petrol additive in the US and elsewhere throughout the world. Higher crude oil prices could, in fact, benefit sugar growers as they would underpin the demand for cane for production of ethanol.

Tea

A chronic oversupply remains a feature of the global tea market. The UN Food and Agriculture Organisation (FAO) expects world black tea production to rise 1.8%/year between 2005 and 2016, versus consumption growth of 1.3%. The FAO projects that global annual black tea exports could reach 1.3m/t in 2010 from currently 1.1m/t. About half of the projected increase would originate in sub-Saharan Africa, where production is forecast to grow whilst domestic consumption, unlike in India, remains small.

Africa's total black tea exports are projected at 475,000t by 2010, up 29.4% on 2004. Kenya--the world's third-biggest producer--will account for 25% of market share or 330,000t, according to the FAO. Growth in tea production is also expected in Uganda and Tanzania. New statistics indicate that Kenyan exports could reach 358,000t by 2014.

The trend in world production remains firmly upwards. The Economist Intelligence Unit (EIU) in its 2007 food & beverages outlook notes: "Capacity is rising, owing to some expansion of the planted areas--but mostly through the rejuvenation of plantations using higher-yielding, disease-resistant plants."

In 2005, tea output jumped 3.3% to a record 3.5m/t, while consumption rose by 1-1.5%, creating a larger surplus.

Total 2006 Kenyan crop reached 310.6m kg, down from 328.5m kg in 2005, mainly due to a drought in the first-quarter.

Africa's largest producer might diversify into products like 'green tea, which attracts more demand worldwide--and hence a higher premium compared to black tea exports.

Major cocoa grinding countries

               2005/06
               (000' t)

Netherlands     470
USA             426
Cote d'Ivoire   360
Germany         302
Malaysia        250

Production of cocoa beans in Africa (000' t)

                            2001/02  2003/04  2005/06  (%) chg 2002/2006

Africa                      1,952    2,550    2,577     32.0
Cote d'Ivoire               1,265    1,407    1,387      9.7
Ghana                         341      737      740    117.3
Nigeria                       185      180      170     -8.1
Cameroon                      131      162      168     28.2
Africa (%) of World output     68.1     72.1     71.7    3.6
Price ($/t)                 1,580    1,534    1,557     -1.4