Singapore, 4 July 2011: Reuters

Rising production in Africa, a surplus in international markets, erratic weather in Indonesia, global economic health and hopes for a recovery in the grinding sector will dominate a cocoa conference in the Indonesian resort island of Bali this week.

Cocoa futures soared to a 32-year top at $3,775 a tonne in early March after a deadly post-election conflict in the world's largest producer, Ivory Coast, fuelled fears of a civil war. But prices have since slipped as peace gradually returned.

The International Cocoa Organization (ICCO) has also raised its forecast for a global cocoa surplus in 2010/11 to 187,000 tonnes, from a prior expectation of 119,000 tonnes, due to an upward revision of output estimates.

"Fundamentally, the supply looks pretty adequate for the market. I guess for cocoa, it usually has some relationship with the performance of the economy," said Lynette Tan, an analyst with Phillip Futures in Singapore.

"When the economy is down, usually there's less consumption of cocoa products. I mean, the macro-economy doesn't look very bright recently. Cocoa prices could still be pressured." Liffe September cocoa futures closed up 9 pounds at 1,992 pounds on Friday. ICE September cocoa settled up $4 at $3,155 a tonne on Friday, but prices were still well below the recent peak as bean shipments resumed from Ivory Coast.

The ICCO pegged Ivory Coast's output at 1.3 million tonnes in the season to September and No. 2 grower Ghana's at a record 960,000 tonnes. Third-largest producer Indonesia's output was estimated at 510,000 tonnes.

"I'd really like to get the feel of the demand situation," said Abah Ofon, commodities analyst at Standard Chartered Bank in Singapore. "I mean the one concern that I have is that the GDP growth in the U.S. is likely to slow and Europe is looking shaky. Are we going to see grindings in those regions actually tick up? They've been looking a little bit sluggish."

Data from North America and Europe showed grindings rose in the first quarter of this year, but the increase was due to disruptions in exports and grinding activity in Ivory Coast.

As the Ivorian cocoa sector recovers from the deadly conflict, butter prices in Asia also weaken. Grinders are struggling to sell butter and powder, key ingredients for making chocolates, as cocoa products from Ivory Coast enter the market, giving buyers more options.

Butter ratios were at 1.20 times London futures, having jumped to 1.40 times in January on concerns that Ivorian growers might honour a call for a ban on bean exports after the disputed election re-ignited a 2002-3 civil war. A four-month power struggle in the West African state ended in April when former leader Laurent Gbagbo was arrested by troops loyal to his rival Alassane Ouattara, now president after U.N.-certified results showed he won a November poll.

"Some people who have a lot of stocks may want to throw the butter away for nearby shipments. Some people claim they are willing to sell butter at lower ratios," said a dealer in Singapore.

YEAR-END DEMAND, INDONESIAN CROP

But year-end demand could lift the product market in the third quarter, while erratic weather this year in Indonesia's main growing island of Sulawesi could take its toll on bean quality, possibly offering support for global prices.

Indonesia may see this year's output fall to its lowest since at least 2004 at 420,000 tonnes due to erratic weather and a fungal disease, the Indonesian Cocoa Association. Barry Callebaut , the world's largest maker of chocolate products, expects a growing taste for chocolate in the emerging market.

"We are going to see an increase in seasonal demand. Prices will go up ahead of Christmas and that sort of thing. I was also expecting to see slightly better grinding numbers from North America and Europe," said Ofon of Standard Chartered Bank.

"I am looking for $3,300 a tonne for Q3. I also feel we are going to see a bit more of an increase in commodity prices, probably at the end of Q3 heading into Q4," said Ofon, who forecasts cocoa prices at $3,500 a tonne in the fourth quarter.

Chocolates fly off the shelves in the main consuming regions of Europe and North America during Christmas at the end of the year, Valentine's Day in February and Easter in the spring.

Ends --

Reuters – for Commodities Now.