Dollar Weakness Lifts Cocoa Prices

Cocoa prices are surging, driven by a weaker dollar and persistent concerns over global supply. Nigerian cocoa exports saw an 11% year-over-year decline in April, and the Ivory Coast's mid-crop is facing quality issues with processors rejecting beans due to poor quality. Despite recent rainfall in West Africa, drought conditions persist, and the ICCO has revised its 2023/24 global cocoa deficit to -494,000 MT, the largest in over 60 years; however, ICCO forecasts a global surplus for 2024/25, creating uncertainty about future price direction.

Analysis

Cocoa prices are exhibiting upward momentum, with July ICE NY cocoa (CCN25) climbing +3.13% and July ICE London cocoa (CAN25) up +1.03%, primarily driven by a -0.65% depreciation in the dollar index (DXY00) to a 3-1/4 year low, which generally supports commodity prices. However, gains in London cocoa were constrained by the British pound's rally to a 3-1/4 year high, adversely affecting sterling-denominated contracts. Persistent global supply concerns underpin the price surge, highlighted by an 11% year-over-year decline in Nigerian April cocoa exports to 18,561 MT and quality issues with the Ivory Coast's mid-crop, where processors report 5-6% poor quality beans compared to 1% in the main crop; this mid-crop is estimated at 400,000 MT, down -9% year-over-year. The International Cocoa Organization (ICCO) has amplified these concerns by revising its 2023/24 global cocoa deficit to -494,000 MT, the largest in over 60 years, with global production falling -13.1% y/y and the stocks-to-grindings ratio hitting a 46-year low of 27.0%. Conversely, potentially beneficial rainfall in West Africa and a rebound in ICE-monitored US port inventories to an 8-3/4 month high of 2,269,384 bags introduce bearish pressures. Demand-side anxieties are also evident, with Barry Callebaut reducing its annual sales guidance, Hershey Co. (HSY) reporting a 14% Q1 sales decline and anticipating $15-$20 million in Q2 tariff costs, and Mondelez International (MDLZ) citing weaker-than-expected Q1 sales due to high prices and economic uncertainty. While Q1 global cocoa grindings in North America (-2.5% y/y), Europe (-3.7% y/y), and Asia (-3.4% y/y) declined less than feared, the overall demand outlook remains cautious. Compounding market uncertainty, the ICCO forecasts a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with production projected to increase by +7.8% y/y, creating a stark contrast to the current deficit situation.

Key Decisions for Investors

• Investors should closely monitor West African weather developments, crop quality reports from Nigeria and Ivory Coast, and actual export figures, as these are critical determinants of ongoing supply-side volatility and price direction.
• Given the reported sales declines and negative outlook from major chocolate manufacturers such as Hershey (HSY) and Mondelez (MDLZ), alongside tariff concerns, it is crucial to evaluate the risk of demand destruction at current high cocoa price levels.
• The ICCO's projection of a significant current deficit followed by a potential surplus in 2024/25 suggests heightened market uncertainty; therefore, consider strategies to manage price volatility and re-evaluate long-term cocoa positions as clarity emerges on the 2024/25 crop outlook and actual supply-demand balance.