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Prices remain firm for softs.

The past year has generally been as good to African agricultural commodities as it has been to their mining and energy counterparts. There has been strong global demand for African crops such as cocoa, tea and coffee but the glut in the supply of sugar continues to depress prices for this crop. Analysis by Moin Siddiqi.

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The 18th century economist Thomas Malthus envisaged a growing imbalance between population growth and agricultural production. His predictions may explain today's market sentiment. A combination of climatic trends, demographics, burgeoning food demand (amid supply tightness) mean farm product prices should keep rising. This is good news for the developing world producers, though bad news for shoppers.

One analyst put it: "Miners have dug deep and reaped huge profits in recent years, but planters of crops are beginning to gather an equally profitable harvest. There is a lot of blue sky, not only over farmers' fields, but also in investor thinking. As a result, the rally in agricultural prices may be only just beginning."

Barclays Capital, the UK investment bank, estimates that $125bn is currently invested in commodity indices such as the Goldman Sachs Commodity Index--a large increase on last year's inflows. On the demand side, the United Nations projects global population reaching 9.4bn by 2050 (from the current 6.5bn); coupled with increasing life expectancy and rising incomes, this will drive consumption of protein-rich diets, which require more agricultural land.

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But the intensive farming techniques of recent decades have depleted the soil, thus productivity is faltering. The Public Ledger, a London-based commodity journal, said: "Supply restrictions include a slowdown in yield expansion, diseconomies of scale as farming has to move to more marginal land, global warming and erratic weather patterns, and a scarcity of water and land". True, production over many years remains fairly stable, yet there are an estimated 80m extra mouths to feed each year.

Cocoa

In crop year 2006/07, total world production of cocoa beans was estimated by the International Cocoa Organisation (ICCO) at 3,400,000 tonnes (t), down 8.7% on the previous season. Global grindings, a barometer of worldwide usage, rose by 2.5% to 3,608,000t. That caused a large production deficit (allowing for 1% bean weight-loss) of 242,000t, compared with a surplus of 167,000t during the 2005/06 season.

Stockpiles for end-cocoa year (September 30, 2007) also fell by 13.1% to 1,598,000t, representing stocks/grindings ratio of 44.3%, or five months of annual consumption. By contrast, previous season's stocks were 1,840,000t (stocks/grindings ratio of 52.3%).

West Africa, led by Cote d'Ivoire (the world's top grower) accounted for 70.5% and 65%, respectively, of total cocoa output and exports. The ICCO figures show Ivorian crop at 1,292,000t, Ghana (614,000t), Nigeria (190,000t), and Cameroon (166,000t).

The region's total crop (2,392,000t), however, fell 9.5% on 2005/06 harvests, due to dry weather that lasted until February 2007. Asia and South America produced 17.5% and 12%, respectively, of global crop. Major non-African producers are Indonesia (490,000t), Brazil (126,000t), and Ecuador (115,000t).

On the consumption side, Europe's grindings of cocoa beans last season totalled 1,540,000t, Americas (853,000t), Asia (699,000t) and Africa (514,000t). The five largest grinders in 2006/07 were Netherlands that used 465,000t, followed by the US at 418,000t, Germany at 357,000t, Cote d'Ivoire a 336,000t and Malaysia at 270,000t.

On a regional level, Europe remains the No.1 consumer--accounting for two-fifths of the market share. By contrast, Africa, key cocoa-growing zones, represents just 14% of world grinding at present.

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The ICCO Secretariat predicts "close balance" in 2007/08 between supply and demand and prices to stay above $1,949/t, up from $1,557/t and $1,845/t, respectively, over the previous two seasons. Dr. Jan Vingerhoets, executive director of the ICCO, said: "Half a year ago, I would have said a surplus (for 2007/08) but the grindings have gone fantastically. There is a strong demand under-current."

A Reuter's poll of analysts supports higher prices this year underpinned by robust global demand, supply tightness, and increased buying by investment funds. One trader remarked: "There will be strong demand for cocoa and chocolate and a struggle to have good quality crops with production highly concentrated between a few suppliers."

Cropcast, a US-based agricultural meteorological division of the Earth Satellite Corporation, projects the 2007/08 world cocoa crop at 3,375,000t, of which the West African harvest is pegged at 2,185,000t (65% of aggregate). Cote d'Ivoire has recently cut forecast for the main crop season (October-March) to 1,000,000t from 1,100,000t. Ghana's Cocoa Board (Cocobod) still expects the 2007/08 harvest at 620,000t, with 600,000t comprising main crop.

With global consumption projected at 4m tonnes by 2010 and manufacturers becoming more reliant on African supplies, sub-Saharan producers have set ambitious production targets. Ghana hopes to produce up to 1,000,000t by 2010 (up from a zenith of 740,000t in 2005/06) by increasing the amount of fertiliser used on farms. A Cocobod official said: "We're upbeat about this target. The fertiliser programme has taken off in earnest this season."

Nigeria and Cameroon aim to produce 600,000t and 320,000t over the long-term. "The National Cocoa Development Committee [Nigeria] has developed a blueprint for the sustainability of increased cocoa production," says Dickson Okolo, assistant director at the Agriculture and Water Resources Ministry.

Manufacturers are looking to build new processing facilities as demand for cocoa products such as powder, butter, liquor and chocolates is rising. Africa is likely to see the fastest growth in terms of the percentage of cocoa grind. The ICCO noted: "Globally, processing is quite stable around the regions at present but Africa is increasing its share faster than all the other regions."

Giant agro-companies likes of Archer Daniels Midland (ADM), Barry Callebaut and Cargill are expanding into Africa in recent months--bringing investments and the transfer of new technology--thus developing a downstream (value-added) industry.

Cargill and ADM are building facilities in Ghana, whilst Barry Callebaut plans to boost capacity by 50% in Cote d'Ivoire over the next two years. Mark Bemis, president of ADM Cocoa, said new processing facilities in Kumasi and the port of Tema "fit securely within the Ghanaian government's strategic and economic objectives of adding value to its cocoa production."

Ghana aspires to process more than 40% of its harvest for domestic consumption and exports, with 35% processed by private companies. The Ghanaian President, John Agyekum Kufour told delegates at the 70th Cocoa Producers' Alliance (Copal) meeting last October: "If we prioritise these objectives in our respective national development agenda, I believe we would be heading towards fulfilling the dreams of the founding members of Copal and helping to reduce poverty among a large section of the cocoa growing communities in various countries."

Tea

The London-based International Tea Committee reported 2007 world output standing at 1,552,129t, led by the "big three"--namely India (938,019t), Kenya (374,498t) and Sri Lanka (296,899t). On a regional basis, Asia accounts for 75% of the total tea crop versus Africa's 25% market share.

Beside Kenya, other sub-Saharan growers are Malawi (47,752t), Tanzania (28,157t), Zimbabwe (15,341t) and Uganda (13,745t). Rwanda's crop rose 25% over 2006 to 20,000t.

Rwanda, (compared with Kenya) is a tiny producer, but has introduced new speciality teas to boost production and revenues. It has 10 factories (six of them owned by the Rwanda Tea Authority).

The Malawian tea also has a special value with its honey gold colour that is unique--unlike some poor quality Indian blends that have added to the perennial 'supply glut' over the years. The 2008 harvests in Malawi and Rwanda are expected at 45,000t and 22,000t, respectively.

Projections for Kenya's crop are not available in the aftermath of the post election violence. Using a different weighting system, the Tea Board of Kenya (TBK) put the 2007 crop at a record 369m kg, up 20% on the previous year, buoyed by good rains in the Western Rift Valley region, as well as Kericho and Nandi. Last year exports totalled 345m kg (the world's largest). Prime markets were Afghanistan, Britain, Egypt, Pakistan and Sudan--representing about 75% of exports.

The country's tea industry is affected by rising output costs, the Kenya shilling's appreciation and depressed market prices with global crop exceeding demand by 2.3% in the past eight years.

Peter Muthoka, managing director of one of Kenya's major tea producers Sasini, explained: "The cost of labour and exchange rates remain the main constraints to agriculture." Kenyan workers are paid $2.55 daily compared with less than $1 a day in Malawi, Rwanda and Uganda. Kenya is, however, pursuing promotional activities and diversifying its products by growing 'green tea', which enjoys a higher premium to Black tea and Best Pekoe ones. It is also promoting local tea consumption, which according to TBK is "slowing yielding results with per capita consumption rising from 0.45 grams to about 0.5 grams."

In 2007, tea price on three auctions (Colombo, Kolkata and Mombasa) averaged $2.04/kg, up from $1.87/kg during 2006. But prices were below the $2.48/kg in 2000.

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Coffee

World coffee crop for the 2007/08 season (April-March) is expected at 116m bags, down 7.2% on last year, according to the International Coffee Organisation (IOC). The major producers are Brazil (33.74m bags), Vietnam (15.95m bag), Colombia (12.4m bags), Indonesia (7m bags) and Ethiopia (5.73m bags).

The top-five represent two-thirds of global crop. Cumulative exports over 12-months from December 2006 to November 2007 totalled 95.8m bags compared to 90.9m bags against the same period last season. Total output for 2008/09 is projected at between 123-126m bags.

Meanwhile, coffee consumption is predicted to exceed 125m bags, up from 123m bags in 2007. Major markets are the US, Germany, Japan, Italy and France. Stronger prices are likely this year according to the ICO. "Market fundamentals remain favourable to the continuation of this firm price trend. Buoyant world consumption is a significant factor in supporting prices," the IOC noted. Last year, average prices for Robustas and Arabicas were $1.91/kg and $2.72/kg, up 28% and 8%, respectively, on 2006 levels. Coffee is the second-most traded commodity, after crude oil. The volume of opening stocks in exporting-countries was 25m bags in October 2007, while stocks of green coffee in importing-countries were 22.6m bags--on a lower scale compared with previous years.

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The ICO puts the 2007 African crop at 15.74m bags (14% of the world's total), comprising 8.59m bags of finer Arabica beans and 7.15m bags of Robustas. The former are mainly used to produce higher quality 'gourmet' blends, whilst Robusta beans are generally used for making instant coffee and lower quality blends.

The big African producers are Ethiopia with 5.73m bags, Uganda with 2.75m bags, Cote d'Ivoire with 2.35m bags, Kenya with 925,000 bags, Tanzania with 867,000 bags and Cameroon with 795,000 bags.

The region exported 10.87m bags, down from 11.33m bags in 2006. Using a different weighting system, Ethiopia's Agriculture Ministry expects coffee output and exports to rise 12% and 25% in 2007/08 to 370,000t and 220,000t, respectively. But the Coffee Board of Kenya fears that 2008 harvest could plunge by 30% to 54,000t due to an outbreak of coffee berry disease.

Uganda, Africa's biggest exporter of robusta coffee, has launched a new 'agricultural productivity enhancement programme' in collaboration with Coffee Research Centre and exporters. It is hoped the scheme (costing Uganda shillings 1.5bn or $874,635) can boost coffee output to 4.5m bags by 2015, driven by replanting of 20m robusta seedlings annually and improving farm practices among the 1.7m coffee farmers in the country.

The Uganda Coffee Development Authority wants to increase exports to 3m bags by late 2009 from 2.8m bags this year. It earned $257m from exporting 2.7m bags during last season (ending September 2007). The European Union remains the largest market for Ugandan coffee (taking 90% of total output), followed by Sudan, the US, Israel and Hong Kong. But current shipments are being hit by problems in neighbouring Kenya. Exports through the Kenyan port of Mombasa account for 75% of shipments.

Sugar

Fundamentally, the market remains hugely 'over supplied', which explains why sugar was excluded from the rallies in soft (agricultural) sector during 2007. Average global sugar price last year fell 32% to $0.22 cents per kg. The 2006/07 season (ended September 30) yielded about 167.3 million tonnes (mt) in raw value terms, with consumption pegged at 153.3mt. That created a supply glut of 14mt. Ending stocks were put at 46.6mt, a rise of 5.1mt on the year.

The International Sugar Organisation (ISO) expects continuous surplus (11mt), with output and demand reaching 170.3mt and 159.2mt in 2007/08. Leading producers are the EU countries, Brazil, India and China.

Czarnikow, the London sugar merchant, also expects a bumper 172.4mt crop against world demand of 161.8mt and FO Litch, commodities specialists, pegs new crop at 169.2mt. Litch said despite lacklustre prices, production should rise because of the seasonal nature of sugar planting, use of fixed assets, availability of export subsidies and buffer stocks in some countries. "It therefore cannot come as a surprise that the train does not come to a grinding halt in 2007/08 and production is forecast to rise by more than 3m tonnes. This means another addition to stocks of 10m tonnes plus," it added. The sugar industry is facing a second season of sizeable trade surplus with booming stocks.

The downward spiral could peter-out with prices recently showing signs of a recovery. The trend should change, according to Morgan Stanley. The Wall Street bank is positive on sugar outlook, projecting a hefty 50% surge over the medium-term underpinned by lower production and dwindling stocks.

Sugar prices are predicted to average 17c/lb in 2010-11, up from 11c/lb in 2007/08 season. The ISO in its latest report concurred: "First tentative indications show that next season's [2008/09] gap between world production and consumption may disappear and even a small global deficit comes into view."

Africa's sugar industry has substantial growth potential, reflecting ample availability of land and water, as well as cost competitiveness. Also, most countries benefit from good soils and [largely] favourable climate. But the continent has lagged behind other regions in establishing a thriving industry. In terms of sugar production, Africa's share of world output fell to 6.3% in 2006/07 from 7.4% in 1997/98. Similarly, its share in global sugar exports dropped to 8.7% from 9.4% in the same period. Most countries are sugar importers--the continent accounted for 17.2% of world imports in 2006/07 compared with 16.7% a decade ago. It consumes 10% of annual sugar crop.

For the 2007/08 season, Africa's output and consumption are estimated at 10mt and 16.1mt, respectively, thus a trade deficit of 6mt. South Africa, Africa's No. 1 producer and exporter, reported 2.46mt in 2007 from cane harvest of 20.89mt. South Africa is home to giant sugar companies (notably Illovo and Tongaat). Ethiopia plans to expand annual sugar production to 1mt by 2011 (from 600,000t in 2008). Mauritius, the EU's leading supplier of sugar, is expecting a production of 520,000t and Tanzanian output rose to 260,000t in 2006/07, up from 100,000t a decade ago. However, it remains a net importer to the tune of 250,000t a year.

Mozambican output could hit 500,000t by 2009 from a high of 265,000t in 2005.

Malawi also aspires to expand annual production to 295,000t by 2010 and to 350,000t by 2015, with the help of foreign investments from Illovo.
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Title Annotation:COMMODITIES
Author:Siddiqi, Moin
Publication:African Business
Geographic Code:60AFR
Date:Mar 1, 2008
Words:2699
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