Cocoa Prices Sharply Lower on the Prospects for Ample Global Supplies

Cocoa prices recently fell sharply to multi-week lows, driven by expectations of a robust West African crop and weak global demand, evidenced by significant Q3 grindings declines in Asia and Europe and disappointing chocolate sales. This downward pressure contrasts with several bullish indicators, including record fund net-short positions ripe for a short-covering rally, cocoa's impending inclusion in the Bloomberg Commodity Index expected to attract substantial passive investment, and historically low ICE inventories. While the International Cocoa Organization projects a 2023/24 deficit, its forecast for a 2024/25 surplus, alongside recent Ivory Coast export data, suggests a complex and volatile market outlook.

Analysis

Cocoa futures experienced a sharp sell-off, with NY cocoa hitting a 4-week low and London cocoa a 3-week low, driven by expectations of a robust West African crop and weak global demand. Mondelez reported West African cocoa pod counts 7% above the five-year average, while Q3 cocoa grindings in Asia and Europe declined significantly by -17% and -4.8% year-over-year, respectively, indicating softening consumption. Hershey's CEO also noted "disappointing" Halloween chocolate sales, further underscoring demand weakness.

Despite the recent downturn, several factors suggest potential for price support or volatility. Funds have accumulated a 4-year high in net-short positions in London cocoa, totaling 19,194 contracts, which could fuel a short-covering rally. Additionally, cocoa's impending inclusion in the Bloomberg Commodity Index in January is projected to generate substantial passive inflows, estimated at $1.9 billion in futures purchases over 80 days.

Conflicting supply-side indicators add complexity to the outlook. While the International Cocoa Organization (ICCO) revised the 2023/24 global deficit to a 60-year high of -494,000 MT, it simultaneously forecasts a 142,000 MT surplus for 2024/25 due to a projected 7.8% increase in production. Meanwhile, Ivory Coast cocoa exports from October 1 to November 8 were down -9% year-over-year, potentially offering some price support.

Key Decisions for Investors

• Investors should closely monitor fund positioning for potential short-covering rallies, given the 4-year high in net-short London cocoa positions
• Evaluate the impact of cocoa's upcoming inclusion in the Bloomberg Commodity Index, which is expected to drive significant passive fund inflows from January
• Assess the evolving supply-demand dynamics, weighing the ICCO's conflicting 2023/24 deficit and 2024/25 surplus forecasts against real-time West African crop developments and export data