Cocoa Prices Rebound as ICE Inventories Continue to Shrink

Cocoa futures rose today, recovering from 1-week lows, driven by shrinking ICE inventories in US ports and a weaker British pound, alongside reduced Ivory Coast exports and projected lower Nigerian production. However, significant bearish pressure persists from expectations of a global cocoa surplus due to favorable West African weather and increased pod counts, coupled with weak global demand evidenced by sharp Q3 declines in Asian and European grindings and over 21% lower North American chocolate sales. While the International Cocoa Organization (ICCO) projects a record 2023/24 deficit of 494,000 MT, it also forecasts a 142,000 MT surplus for 2024/25, indicating a highly volatile market influenced by both supply constraints and demand weakness.

Analysis

Cocoa futures rebounded today, with December ICE NY cocoa up +1.40% and London cocoa up +1.76%, recovering from recent 1-week lows. This recovery is primarily attributed to shrinking ICE-monitored cocoa inventories in US ports, which fell to a 7-month low of 1,836,163 bags, alongside a weaker British pound boosting sterling-priced London cocoa.

Despite short-term support, the market faces conflicting supply signals. While the International Cocoa Organization (ICCO) revised the 2023/24 global deficit to a record -494,000 MT, driven by a -13.1% year-over-year production decline, it projects a 142,000 MT surplus for 2024/25, marking the first surplus in four years. This anticipated surplus is fueled by favorable West African weather and a 7% above five-year average cocoa pod count, contrasting with current Ivory Coast export slowdowns (-24% y/y) and projected lower Nigerian production for 2025/26.

Significant demand-side weakness persists, exerting bearish pressure. Q3 Asia cocoa grindings plummeted -17% year-over-year to a 9-year low, and European grindings fell -4.8% to a 10-year low. North American chocolate sales volume also declined over -21% in the 13 weeks ending September 7, indicating that high cocoa prices are dampening consumer demand globally.

Key Decisions for Investors

• Monitor the evolving supply-demand dynamics, particularly the divergence between current inventory drawdowns and ICCO's projected 2024/25 surplus.
• Evaluate the persistence of weak global cocoa demand, as evidenced by significant declines in Q3 grindings and North American chocolate sales, which could cap price upside.
• Consider implementing hedging strategies or maintaining flexible positions due to the high volatility stemming from conflicting short-term supply constraints and long-term surplus expectations.