Industry Trend Analysis - Brazil To Target Cocoa Self-Sufficiency As Production Shifts North - OCT 2017

BMI View: This season's rebound in Brazilian cocoa production indicates that the country could avoid excessive reliance on imports over our forecast period to 2021. The shift in production from Bahia in the North-East to the Amazon region in the North , in particular, has reduced the impact of drought and disease on the cocoa crop. Government investment will seek to extend this dynamic going forward, and efforts will also be made to add value through sustainable production and certification.

2016/17's first Brazilian cocoa crop was harvested in March, with the second crop harvest taking place between June and September. The cocoa sector has experienced a solid rebound of 40.8% y-o-y, to 214,100 tonnes, after output tumbled from 209,000 tonnes in 2014/15 to 152,000 tonnes in 2015/16 due to dry weather in the State of Bahia. We expect Brazil to maintain this upward trend in production and remain just below self-sufficiency to the end of our forecast period in 2021. Increased production will be possible due to a number of structural changes detailed below, as well as ambitious government incentives being introduced this year.

Positive Outlook On Cocoa Output To Reduce Import Dependency
Brazil - Cocoa Production And Consumption ('000 tonnes, LHS) And Production Balance ('000 tonnes, RHS)
Sources: IBGE, BMI

Structural Trends

The 2016/2017 harvest witnessed a significant change in the structure of Brazil's cocoa output, as the State of Para (located in Brazil's rainforest biome to the north) finally overtook the State of Bahia (in the drier, north-eastern region) as the country's largest producer of cocoa. The shift drove much of this year's output gains, as Para has hitherto managed to avoid the periodical drought and disease epidemics that have decimated production in Bahia over recent years. In particular, the absence of the Witches' Broom disease has allowed Para to achieve yields several times better than those that currently prevail in the more traditional cocoa-producing region of Bahia.

Para Overtakes Bahia With Higher Yields
Brazil - Regional Share Of Cocoa Production (tonnes), LHS; Area Harvested (ha), Production (tonnes), And Yields (kg/ha) in 2017, RHS.
Source: IBGE, BMI
Weakening BRL Boost Cocoa Production
Brazil - Cocoa Trade Deficit in Value (USD) And Volume (tonnes) Terms, LHS, And Exchange Rate, BRL/USD, ave, RHS.
Sources: Trade Map, BMI

Government incentives

Cocoa production is also being supported by the current government, which initiated a concessional credit programme worth BRL 2.13bn in June 2017, targeted at forestry and agro-forestry cocoa systems. The funds are part of the Ministry of Agriculture's low-carbon emissions programme, and is being extended from the Amazon to other regions, like Para and Espirito Santo. In addition, a Bill has been introduced in Congress (PLC7/2017) that seeks to incentivize a shift towards premium or 'fine' cocoa varieties by introducing a nationwide certification system and incentivising the development of premium varieties. Given the above, we expect government policy towards the sector to stimulate production and add value to Brazilian cocoa production in the coming years.