London, June 5 - Cocoa prices have outperformed other soft commodities in 2008 on fears over the quality and output of beans from top grower Ivory Coast, and have room to rise further if the supply outlook worsens later this year.
London cocoa futures have surged over 40 percent since the end of 2007, powering higher on investment fund buying early in 2008, then losing momentum before clawing higher again, driven by concerns over output and low stocks relative to demand.
In the meantime, robusta coffee prices are up a much more modest 16 percent. And raw sugar, grappling with a huge global glut, is down 11 percent and appears set for further losses.
The International Cocoa Organization (ICCO) says the global stocks-to-grindings (demand) ratio stands at just 41 percent, a 22-year low, and is a key reason for cocoa's high price.
Demand for cocoa is growing steadily, with brightest prospects seen in the emerging Asian markets and eastern Europe.
"If we have a third consecutive year of global deficit next season, there is room for upside in prices," said Laurent Pipitone, senior statistician with the London-based ICCO.
The ICCO sees a tight supply scenario, forecasting a global cocoa deficit of 41,000 tonnes in 2007/08 (October/September), after a 301,000 tonnes deficit in 2006/07.
Based on an econometric model that strips out weather, the ICCO sees a small surplus of 71,000 tonnes in 2008/09, but that figure could easily be revised into a deficit if the outlook for West African main crop harvests deteriorates due to bad weather.
Jonathan Parkman, director and head of the agri commodity brokerage at Fortis Commodity Derivatives, said industry cover was relatively low, but noted that overall market conditions may not be as tight as some market participants believe.
Fortis has projected a global cocoa deficit of 6,000 tonnes in 2007/08, after a much bigger deficit of 284,000 in 2006/07.
Dealers said cocoa futures rose in the past week on talk about a report from independent analyst Hans Kilian which referred to a drop in Ivorian mid-crop output due to adverse rains, and concerns over quality, dealers said.
One market source said the report also noted Ivorian main crop output would be disappointing.
Kilian could not immediately be reached for comment.
DOLLAR UNCERTAINTY
Analysts agreed that the fundamental outlook for cocoa was positive, but macroeconomic factors such as the dollar exchange rate could distort prices in the short term.
"We are looking at another year of relatively tight supply and relatively high prices," said Jack Scoville, an analyst for brokers the Price Group in Chicago. "It (price) depends on whether the dollar can turn around here."
The dollar hit a three-month high versus the yen on Thursday boosted by a view U.S. interest rates have troughed.
Federal Reserve Chief Ben Bernanke said on Wednesday rising inflation expectations were a "significant concern", a day after he gave a rare warning that a weak dollar was adding to price pressures, giving a boost to the U.S. currency.
Some analysts believe the Fed could even raise interest rates later this year.
Investment have funds pumped billions of dollars into the mainly dollar-denominated commodities complex this year, partly as a hedge against inflation as the dollar weakened.
Now some analysts believe a strengthening dollar could spark a flight from commodities, and that cocoa could feel the impact.
The ICCO's Pipitone said he believes the impact of a rising dollar would be muted on cocoa as hedge funds' exposure to the commodity is less than to other softs.
"We expect the macroeconomic picture to have an impact," he said. "I believe that cocoa prices are driven by fundamentals. I'm not sure that for the medium to long term, cocoa prices have been affected significantly by fund investment."