Lower cocoa prices to benefit food stocks

PETALING JAYA: The easing of the civil war in Ivory Coast, the largest cocoa-producing country in the world, has sent prices of cocoa beans falling, favouring foodstuff manufacturers which will see some recovery in their profit margins.

After several months of armed clashes, the political crisis in Ivory Coast has started to dissipate, as forces loyal to democratically elected President Alassane Ouattara managed to wrest control over much of the country, including the capital city, Abidjan.

Ouattara won the presidential election in November last year, but his rule was contested as his predecessor Laurent Gbagbo refused to hand over power, resulting in clashes between both sides for almost four months.

Upon winning the presidential election, Ouattara banned the export of the country’s major commodity, cocoa beans, causing the price of the commodity to shoot up from US$3,000 (RM9,090) in mid-2010 to US$3,775 per tonne on March 4 this year.

But now that the political standoff in Ivory Coast has started to cool down, analysts said cocoa prices would continue to fall in anticipation of Ouattara lifting the export ban on the commodity.

Already, the prices of cocoa beans, now at US$2,969 per tonne, have slumped as much as 20% from the high of US$3,733 recorded in March. Analysts predicted that another 12% fall in prices is possible when the export ban is lifted.

“Once the ban is lifted, the market would be flooded with cocoa beans from Ivory Coast and this would press prices down further,” an analyst told The Edge Financial Daily, citing that Ivory Coast is the largest cocoa producer in the world accounting for 60% of the world’s production.”.

The fall in cocoa bean prices would help foodstuff manufacturers such as Nestle (M) Bhd, Cocoaland Holdings Bhd, London Biscuits Bhd and Apollo Food Holdings Bhd to recover some of their profit margins, which had been burdened by the high price.

Note that Nestle’s net profit for 4QFY10 ended Dec 31, plunged 54% to RM39.3 million from RM86.2 million in the corresponding period a year ago, despite a slightly higher revenue of RM963.9 million versus RM950.6 million in FY09. The company attributed the profit contraction to the sharp increase in cocoa and milk prices that dented its gross margins.

An analyst said that the fallback in cocoa prices would benefit Nestle as it has a range of products which use cocoa as the main ingredient such as Milo products and cereals like Koko Krunch.

He predicted that there would be no price adjustments in these Nestle products even though cocoa prices had gone down, as the company may leverage on the lower input cost of cocoa to hedge against the price hikes of other ingredients, such as milk and sugar.

With cocoa bean prices falling, Nestle’s stock continues to climb, closing at RM47.86 yesterday, nearing its 52-week high of RM48 recorded on March 25.

According to analysts, lower cocoa prices may also benefit Guan Chong Bhd, which grinds cocoa for sale to foodstuff manufacturers such as Nestle.

They said while the increase in price had enabled Guan Chong to value its inventory higher, the recent decline in cocoa prices could also provide the company with an opportunity to buy more cocoa beans to replenish or increase its stocks.

Guan Chong’s balance sheet as at Dec 31, 2010, showed that the company’s inventory had been reduced to RM154.9 million from RM207.2 million as at June 30, as it used up some of the stocks. Most of the company’s current inventories of cocoa beans were purchased in bulk when prices were low.

Guan Chong’s share price fell to a low of RM1.75 on March 3, during the peak of the political crisis in Ivory Coast and the spike in cocoa price then. Since the fall in cocoa prices, the stock has recovered some lost ground to close at RM2.45 yesterday.