Prolonged premium draws more West African cocoa to United States

There has been a surge of West African cocoa beans being shipped to the United States, as exporters rush to capture an unusual premium that has emerged in the New York futures market.
Industry sources say prices in New York have been boosted by a reduced flow of supplies from Ecuador while the London market has been depressed by aggressive speculative selling coupled with an abundance of old or low-quality cocoa from Cameroon.
London’s cocoa futures market typically commands a premium to the New York contract, reflecting stronger demand in Europe, where the bulk of beans from the world’s top producing region are processed.
The New York contract, however, moved to a premium that in December shot above $130 per tonne relative to its London equivalent. The differential has retreated more recently, but New York was still trading at a premium ranging from $25 to $45 this week.
While New York cocoa has traded at a premium to London in the past, dealers said it is highly unusual to see the arbitrage remain at such wide levels for so long.
“There is a clear incentive to ship any spare cocoa to the U.S.,” said one industry source.
It’s still unclear exactly how much Ivorian and Nigerian cocoa has made its way to the United States so far, but total cocoa stocks in ICE U.S. licensed warehouses stood at 255,654 tonnes as of January 29, exchange data shows.
This was up from 215,587 tonnes at the same time last year, a level that was already above average due to a massive global surplus in the 2016/17 season.
Certified U.S. stocks - although representing only a small slice of all cocoa in the United States - also signal a shift. Ivorian and Nigerian beans combined now make up 79 percent of these supplies, up from 19 percent a year ago.
Ivory Coast cocoa stocks in certified warehouses stand at 5,290 tonnes, up from just 422 tonnes a year ago. Nigerian beans total 2,387 tonnes, up from 240 tonnes in late January 2017.
Dealers estimated the attractive arbitrage may have drawn between 30,000 and 80,000 tonnes of additional Ivorian and Nigerian cocoa over the last three months - with even more cocoa expected to be shipped over the next few months.
“For sure, we’re seeing more shipments going to the U.S.,” said one dealer. “People who have physical supply will definitely take advantage of the arbitrage.”
IMBALANCE
Industry sources said the shift in arbitrage has partly been due to a collapse in Ecuadorian shipments, after the discovery of a noxious weed in some imports.
“Because of the rejections, people (in Ecuador) have been less keen to ship to the U.S.,” said another dealer. “And have found demand from Asia very good, so they’ve been shipping Ecuador beans there.”
Dealers estimated about 6,000 to 8,000 tonnes of Ivorian and Nigerian beans were being shipped to U.S. cocoa processors each month as a replacement for the decline in Ecuador supplies.
There are currently no certified stocks of Ecuador beans, according to exchange data. A year ago, there were 2,420 tonnes of Ecuador beans, representing some 67 percent of all certified supplies.
London prices, meanwhile, have been under pressure as speculators have taken an unusually aggressive bearish stance on that market, while easing their short-selling in New York.
It has also been weighed by an abundance of old or low-quality cocoa from Cameroon, which buyers have been hesitant to take even at dramatic discounts.
This follows changes to grading rules last year, which have boosted the volume of lower-quality Cameroon cocoa on the London terminal market.
“The London futures market is becoming more and more representative of Cameroon cocoa, rather than Ivory Coast or Nigerian cocoa, which is what it has traditionally been,” said Jonathan Parkman, head of agriculture at Marex Spectron.
Market participants said they expect shipments of Ivorian and Nigerian beans to pick up further from January to March, and to potentially continue as far out as June.
“We should see stocks continue to build,” said another industry source. “Eventually, the sheer weight of cocoa hitting the U.S. should move the arbitrage to more sustainable levels.”