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Investor Relations

Cocoa market knowledge, risks and opportunities

By Amit Suri, Chief Operating Officer, Olam Cocoa

Having recently passed our first anniversary, it’s appropriate to highlight how the multiple functions within our global commercial operations team made a success out of what has been an otherwise incredibly challenging year for the entire cocoa industry.

Operating within the four global verticals of cocoa beans, processing, cocoa products, macro and strategic trading, and research, and across the five major geographic regions of Western Europe, East and Central Europe, Asia, Africa, and North and South America, during the course of the past year we managed to develop and implement a unified approach on strategy, risk management, and external contact best practices with customers, suppliers and service providers.

Our journey a year ago started with extremely tight margins and high cocoa bean costs with inverted structure. The market remained highly volatile for months, with prices moving in the range of more than 40% due to factors including global, macro-economic issues, industry-specific cocoa supply and demand concerns.

Chinese market weakness and a poor outlook in January dropped prices to low points of below £2,000.  The Brexit announcement pushed prices to high points, above £2,500, as cocoa remains the only major agricultural commodity traded in GBP. Brexit was also followed by a weakening GBP against the Euro and USD, which created a less expensive market for consumers as well as for major industrial chocolate producers.

The challenges experienced were nearly unprecedented, with supply and demand the major factor behind price moves in futures, structure, cocoa beans and cocoa butter. These issues created periods of exceptional market turbulence and arduous trading conditions. Despite this, Olam’s unique capabilities in terms of research, strategic trading, operations, analysis and risk management have put us in a position where we are significantly better off than we were a year ago.

Our market knowledge remains our greatest strength through our world leading crop research and analysis functions. These functions add immense value to our operations. When the market was at its most tumultuous during the last 12 months, it was the consistent data streams and on-the-ground support from these teams that helped us see potential crop problems with sufficient advance warning. As an example, our research teams correctly forecast the impact of the record dry conditions and heat in both West Africa and Indonesia, as well as the subsequent impact it would have on reducing global supply, giving us a distinct competitive edge.

This insight was the key to positioning ourselves appropriately as a business, with the particular advantages of being well covered from the supply side and the ability to inform our customers in advance of supply status.

When new hurdles arose, our forward data projections and analysis gave us leadership as the foremost cocoa company in the market, particularly during the episodes of greatest market stress, because we were able to fulfil the needs of our customers while they were otherwise facing supply shortages from, and delivery issues with, our competitors.

Our ability to remain nimble over the long term, particularly during the recent market vacillations, is underpinned by the internal knowledge database we have developed over the past 20 years, focused on consistent dataset growth by continually integrating measurable data points and trend indicators from within each origin. This information helps shape and direct our risk management strategies and actions throughout our supply chain and in the derivatives markets.

Our experienced traders bring a nuanced market understanding to the equation as well, which is a particular advantage in a niche commodity like cocoa. We also have direct access to some of the cocoa industry’s leading, externally crafted analyst reports and we are in constant communication with other market participants in order to better gauge the market from a pure, publically available information point of view.

The business however is not without risks. This includes supply risks due to climate change and harmful weather conditions that may, depending on the origin, range from aridity and pronounced drought to deluge and pest vigour. We also continue to see increasing market participation amongst speculators, an issue that can create market unpredictability and instability.

As cocoa is a balanced supply and demand commodity market, any supply issues automatically create a risk. The increasing origination concentration we see in certain geographies and amongst some of the largest market players also increases risk. Finally, the end consumers generate a certain amount of risk for the market due to flat and/or declining demand for chocolate in some market regions that is based around health concerns, valid or not.

We remain cautious about the market volatility and uncertainty ahead, while confident in our structure and our capabilities to capitalise on the opportunities that might be available. The greatest driver of this confidence is the demand growth we see for cocoa powder and chocolate amongst consumers in emerging markets and in countries with expanding demographics that have access to increased discretionary income.