Cocoa grinders sell stock, sending bearish signal on demand

Thu Sep 20, 2012 12:31pm EDT

* Weak Q3 European cocoa grind expected

* Nearby futures premium entices stock holders to sell

By Sarah McFarlane

LONDON, Sept 20 (Reuters) - Slowing chocolate demand and poor cocoa processing margins are triggering the resale of cocoa beans by major processors, European cocoa traders said on Thursday.

Cocoa processors Archer Daniels Midland and Delfi Cocoa, a subsidiary of Petra Foods Limited, are selling cocoa beans back to the market, European cocoa traders said.

"We are operating business as usual, including buying and selling beans," said Jackie Anderson, spokesperson at ADM.

Delfi Cocoa declined to comment.

"It confirms what people expected - a low European grind number again," said a European trader.

Europe's second-quarter cocoa grind, an indicator of cocoa demand, recorded its sharpest quarterly fall of 17.8 percent from the same period last year, Brussels-based European Cocoa Association (ECA) data showed in July.

Third-quarter grinding data is due to be published by the ECA in the second week of October, with expectations for further slippage.

"The market thinks the next grind could be anywhere between minus 15 to minus 18 percent and there's some very extravagant people saying grinding in Europe could fall by as much as minus 20," said the trader.

Even with a bleak demand outlook, prices have stayed near multi-month highs due to uncertainty around cocoa industry reform and crop development in world number one producer Ivory Coast.

Weaker than expected demand can leave some processors with unwanted stocks which they can either carry, or sell back onto the market, at the risk of paying higher prices at a later date when stocks need rebuilding.

"You buy beans for the whole year and if you decide to cut down capacity a bit you have more raw material than you need," said a European trader.

Cocoa processors and chocolate makers had been stockpiling supplies of beans on fears the London market could face a temporary supply crunch if top producer Ivory Coast's overhaul of the sector delays exports later this year.

The concerns over delays have added an incentive for processors to sell as contracts for December delivery on the NYSE Liffe futures market are trading at a premium to later-dated March .

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