Ebola outbreak in W. Africa leaves cocoa supplies vulnerable during crucial harvest season

With inputs from Nishanth R, Senior Research Analyst - Risk

The deadly Ebola virus has been playing havoc in West Africa. Over the past month or so, the virus showed up in many other parts of the world - but it continues to remain virulent in that part of Africa which is crucial to the world's chocolate industry. The human tragedy is so deep that it has killed more than 5,000 people worldwide and the epidemic has been acute in Liberia, Sierra Leone and Guinea.

Ebola has also made its presence felt in Nigeria and Senegal - though it is showing signs of slowing down. Thus far, Ebola has had a significant price impact on the world cocoa market owing to fear premium.

Cocoa bean is the most important raw material for making chocolates. Cote d'Ivoire (Ivory Coast), Ghana, Nigeria and Cameroon are the major cocoa producing countries in West Africa. The region on the whole supplies about 70 percent of the world's cocoa and Ivory Coast, which shares its western border with Liberia and Guinea, contributes almost 40 percent.

Map not to Scale - For representation purpose only

The International Cocoa Organization (ICCO) has previously said that harvesting and shipping of cocoa in Guinea, Liberia and Sierra Leone have been seriously curtailed. ICCO also added that the combined cocoa production in these three countries represents only about 0.7 percent of global output and is likely to have a minor bearing on the global cocoa market. Hence, the supplies of cocoa per se were not much affected.

Meanwhile, chocolate maker Hershey has said that U.S. cocoa stocks are high enough to prevent disruption to supplies well into 2015, playing down concerns that Ebola in West Africa could roil the $12 billion global cocoa market. The company also said that more than half of the annual cocoa supply needed for the U.S. is already in the country.

Contrary to initial fears, confectionary makers have not yet confronted any major supply outages. Also, the cocoa stocks have not dipped to dangerous levels. As per data available from commodities bourse InterContinentalExchange (ICE), warehouse stocks in the U.S. amounted to about 3.5 million bags at the end of October - though it has been in downward trend over the past few months, coinciding with Ebola breakout. The point to be noted here is that buyers go after exchange-listed stocks if and when they are worried about bean supplies coming through normal procurement route.

Data Source: ICE

However, there is still a danger that Ebola could strike cocoa nations.

According to health experts, there is a possibility that Ebola may affect Ivory Coast and Ghana by January 2015 - right in the middle of main harvest season that runs from October to March. Whereas the mid-crop harvest happens between May and August. If Ebola outbreak is intense in cocoa producing regions then it would more likely disrupt the trade flow.

To be sure, Ivory Coast has strengthened its international borders owing to Ebola scare in neighboring Liberia, whose farm workers usually cross the border to work in the country's cocoa plantations. And continued restriction of labor movement across border may lead to delayed shipments of the cocoa beans to processers.

Amidst such a plausible scenario, chocolate major Nestle has said it would speed up cocoa shipments from African countries such as Ivory Coast. Though for now the company has no plans to close any of its eight factories or curb output in West and Central Africa because of Ebola, but is ready to adapt if it spreads.

In case West African cocoa supplies are affected then the companies will have to depend on their own inventories and also draw down from exchange-monitored stocks. Other cocoa producing nations may not be able to fully fill out the market in the rare event of complete disruption to West Africa cocoa supplies.

In these uncertain times, procurement managers need to play the wait and watch game and closely monitor the situation panning out in Africa.  It is worthwhile to remember that even during the heights of civil war in Ivory Coast, cocoa supplies were not fully disrupted. Will it hold true if Ebola spreads its tentacles?

Ebola Impact on West African Countries

Possible Ebola Impact on Cocoa Price and Harvest