UBS lowers cocoa price forecast as deficit narrows, raises coffee outlook

UBS has significantly revised its commodity forecasts, reducing its cocoa price outlook by $1,750 per metric ton across its forecast horizon to a long-term target of $6,000, citing weakened demand and improved production. Concurrently, the bank increased its coffee price forecasts by $0.25-0.50 per pound, primarily due to tariff-related tightening of U.S. inventories. These adjustments reflect UBS's updated assessment of fundamental supply-demand dynamics, indicating easing pressure in cocoa and increasing tightness in coffee markets.

Analysis

UBS has issued divergent price forecasts for cocoa and coffee, reflecting shifts in their respective supply-demand fundamentals. The bank has substantially lowered its cocoa price forecast by $1,750 per metric ton, citing a combination of weakened demand and modest improvements in production which have narrowed the market deficit. Consequently, UBS anticipates prices will decline more swiftly towards its new long-term target of $6,000 per metric ton, a level that remains above historical averages. Conversely, the firm raised its coffee price forecasts by $0.25 to $0.50 per pound. This upward revision is directly attributed to tariff-related tightening of U.S. inventories, which is creating significant supply constraints. These adjustments signal an easing of upward price pressure in the cocoa market, whereas the coffee market, particularly in the U.S., is expected to experience increased tightness.

Key Decisions for Investors

• Investors with long exposure to cocoa should consider the potential for price declines towards the new $6,000/ton target, as the fundamental outlook has weakened due to softening demand and improved supply.
• The bullish forecast for coffee, driven by specific U.S. supply constraints, may present a tactical opportunity for long positions in coffee futures or related instruments, contingent on the persistence of tariff impacts.
• A pair trade, going long coffee and short cocoa, could be considered to capitalize on the divergent fundamental outlooks for the two commodities as outlined by UBS.
• Traders should closely monitor U.S. inventory data and trade policy for coffee, as well as global production and demand figures for cocoa, as these are the key catalysts driving the revised forecasts.