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Cocoa stocks nail down prices.

Although the demand for softs, such as cocoa, tea and sugar, is outstripping supply, African producers should not expect a price bonanza, warns RAFIQ AHMED.

Agricultural commodities, such as coffee ground-nuts, cotton and tobacco constitute over 25% of export earnings in 29 sub-Saharan countries. Since the 1970s, real prices for these non-oil commodities have fallen, especially for tea, cocoa and coffee and African producers have steadily lost their respective market share.

A report compiled by the UK Natural Resource Institute has offered some explanation for the steady decline in Africa's softs markets share. It blames the collapse of international commodity agreements (which attempted to stabilise prices through buffer stocks), US and EU agricultural policies, currency volatility and most importantly on the ever increasing commodity exports from Asian countries which benefit from lower costs and higher productivity.

In the case of cocoa and coffee (two of Africa's principal softs exports), African producers face extensive competition from Indonesia, Malaysia and Vietnam. The present trend towards consumption of milder Arabica coffees in the major importing countries has affected demand for Robusta varieties, which are grown in Uganda, and Cote d'Ivoire as well as in other sub-Saharan countries.

Although the international market for beverage crops is expected to continue growing, African exporters have little option but to further improve their production and marketing systems in order to maintain and boost their market share. The exploration and exploitation of new markets in Eastern Europe and the former Soviet Union is also essential.

Market conditions for softs during the first half of 1997 displayed exceptional volatility in coffee (Africa accounts for 18% of the world crop). World prices for high-quality Arabica beans (which accounts for 50% of world-wide consumption) hit a 20-year high on 30 May, at 318 US cents/pound, on mainly speculative funds and trade buying. Robusta prices on the London International Financial Futures Exchange (LIFFE) also surged to almost $2,600/tonne, though this figure is well short of $4,000/tonne peak of 1994.

However, as expected, the coffee rally proved extremely short-lived, since it was based on projections of a steep drop in the 1997/98 Brazilian crop, the world's largest, due to frost damage. Speculative activity since mid June has abated significantly because it now seems that Brazil has almost certainly escaped frost this summer. Coffee stocks are also now increasing and thus exerting downward pressures on coffee futures.

The Association of Coffee Producing Countries (ACPC) has retained export quotas for the 12 months, effective from 1 July, at 52.75m bags. The Uganda Coffee Development Authority expects exports of between 3.9-4m bags next year, down from 4.2m bags this year. Coffee accounts for 70% of Uganda's export earnings. But exports of milds from Kenya will decline, since its overall output is projected to dip to a four-year low of 78,000 tonnes, from 97,600 tonnes in 1996, due to drought and coffee berry disease.

The cocoa market has been under downside pressures due to a number of factors. These include an improvement in weather conditions in West Africa - which accounts for two-thirds of the world's crop - and persistent forward producers' and investment/commodity funds selling. In addition, the recent steep appreciation of the pound vis-a-vis the French franc, and by implication the CFA franc, has induced hedging by West African producers, especially Cote d'Ivoire, in order to lock in the futures cocoa prices. A stronger pound, in which cocoa is priced, if sustained over a longer period, will reduce import demand in Continental Europe.

Heavy rainfalls in June and July over the cocoa-growing region of Cote d'Ivoire, (the world's biggest producer, accounting for 41% of the global crop) have returned soil moisture to normal and hence a near bumper crop is expected. The US Department of Agriculture estimates the 1996/97 Ivorian crop at 1.1m tonnes - which is considerably higher than its initial projection.

The International Cocoa Organisation (ICCO) has also upgraded its estimates for 1996/97 season ending September by 68,000 tonnes to 2,690,000 tonnes. Though this is 7.8% down on last season's record crop of 2,918,000 tonnes, the upward adjustment reflects higher West African crop (up 139,000 to 1,761,000 tonnes) which will partially offset the impact of lower production in south-east Asia and the Americas. The ICCO forecasts Cote d'Ivoire's crop at 1.125m tonnes and Ghana's at 335,000 tonnes. However both producers' crops are 6% and 7% down respectively on 1995/96 figures.

World grindings of cocoa beans, or consumption, in the current season is estimated at 2,803,000 tonnes, an increase of 3% on 1995/96. The trend of higher chocolate consumption in North America, Europe and Asia is likely to continue over next few years. Thus, on the basis of the ICCO's projections, the 1996/97 season will yield a supply-deficit of 112,000 tonnes. Closing stocks are projected at 1,253,000 tonnes, equivalent to almost 45% of expected demand, or sufficient to sustain consumption, at current levels, for almost five and a half months.

Technically, cocoa values appear overbought at between [pounds]1,100-[pounds]1,200/tonne. Higher prices can prove unsustainable because of an ample stockpile and incentives for forward selling and fund liquidation, which are common in a bull market. Thus on fundamentals, cocoa prices should trade within a range of [pounds]950-[pounds]1050/tonne over the next few months. Lower prices should induce trade buying from manufacturers.

This year, the weather is playing a key role in the tea and, to a lesser extent, sugar markets. The main influence is being exerted by the El Nino phenomenon, the warming of the tropical Pacific Ocean, which can affect crops from southern US, north-east Brazil and south-east Africa to India, south-east Asia & Australia in the western Pacific region. A recent Food & Agricultural Organisation (FAO) statement has warned that consumers world-wide face higher prices for tea, since, for the first time in almost a decade, demand will exceed overall supply in 1997. The FAO says that because of the dry weather caused by the El Nino effect in some of the major growing regions, including east Africa, India and Sri Lanka, world tea output will decline quite substantially from the record 2.7m tonnes in 1996.

With the expected fall in output from Kenya, Sri Lanka and India, which contribute a combined total of 70% of world output, and with demand remaining strong, especially from the Middle East and Eastern Europe, prices will increase by 5% to 10% this year. On average, tea prices have risen by 25% since 1996 and have now stabilised. But if the El Nino weather pattern disrupts monsoons in India and Sri Lanka or seriously affects end-of-year rains in east Africa, then upside price potential can be tremendous.

The Kenyan tea crop over the first five months of 1997 is put at over 80m kg, down from 116m kg during the corresponding period in 1996. Kenya normally produces between 240m kg and 260m kg annually from a planted area of 110,000 hectares. Thompson Lloyd & Ewart, London tea brokers, project the Kenyan crop this year at 225m kg.

The drought has also affected crops in Rwanda, Burundi, Uganda, and northern Tanzania. Experts say world output in the second half is unlikely to close the supply deficit.

Kenyan tea has a high quality premium, ranging from good, medium and very fine; prices for medium quality tea at London auction in early June surged to [pounds]1.71 a kilo, though this was below the peak of [prime]2.62 a kilo in 1994.

Kenya is the world's second largest exporter, ahead of India, which consumes 80% of its annual output whereas 90% of the Kenyan crop is exported. Major importers are the UK, Germany, Netherlands, Ireland, Canada, and Pakistan. Last year, the UK imported about 87,000 tonnes valued at $158m.

However the looming supply deficit notwithstanding, the tea stockpile is still considerable due to average annual world surplus of 80,000 tonnes over the past decade. Tea prices, in real terms, have significantly fallen since the early 1960s.

The sugar market has held fairly steady so far this year. Another supply surplus will be recorded in the 1996/97 season ending September. The International Sugar Organisation (ISO) estimates global output at 123.5m tonnes and consumption at 121.2m tonnes. The African output is estimated at 8.6m tonnes, equivalent to 7% of the world's total. Ending stocks are estimated at 48m tonnes, which is equivalent to a stock-to-consumption ratio of almost 40% or sufficient to cover just under five months of annual global consumption.

The raw sugar prices have remained within 11.3 to 11.5 US cents/lb range for most of the season. The El Nino weather pattern may affect 1997/98 world output, especially in India, the world's largest producer. The US Department of Agriculture projects total output at 122.4m tonnes, but higher consumer demand for sugar containing products is expected to underpin consumption at a record 125m tonnes. Thus expectations of a tighter 1997/98 season and a probability of India having to import to offset its lower output, should underpin prices, despite adequate supplies generated by the 1996/97 crops.

Demand for raws is expected to increase from Middle East refineries, but whites' values may be undermined by higher availability of the Central European and EU sugars.

South Africa is by far the largest producer on the African continent and its 1997/98 crop is projected at 2.5m tonnes, of which 48% will be exported to the Middle East and Asia.
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Title Annotation:Commodities; Africa
Author:Ahmed, Rafiq
Publication:African Business
Date:Sep 1, 1997
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