Cocoa Prices Fall on Favorable West Africa Growing Conditions

Cocoa prices extended their sell-off, primarily driven by expectations of a global surplus for the 2024/25 season, as projected by the ICCO, following favorable West African weather and increased pod counts. This bearish sentiment is reinforced by significant declines in Q3 cocoa grindings across Asia and Europe, coupled with a sharp drop in North American chocolate candy sales, indicating weakened global demand. While the market previously contended with a record 2023/24 deficit and current tight inventories, the focus has shifted to the anticipated surplus and demand destruction.

Analysis

Cocoa prices experienced a significant decline, extending a prior sell-off, primarily influenced by the International Cocoa Organization's (ICCO) projection of a 142,000 MT global surplus for the 2024/25 season. This forecast marks the first surplus in four years and contrasts sharply with the record 2023/24 deficit of -494,000 MT and a 46-year low stocks-to-grindings ratio of 27.0%. The market's focus has clearly shifted from historical tightness to future oversupply.

Favorable West African weather, including scattered showers and a 7% above five-year average cocoa pod count reported by Mondelez, underpins the anticipated surplus. Despite supportive factors like a -24% year-over-year drop in Ivory Coast exports and US port inventories at a 7-month low, increased Ghana deliveries and a projected +7.8% year-over-year rise in 2024/25 global production to 4.84 MMT contribute to the bearish supply outlook.

Compounding the bearish sentiment is clear evidence of demand destruction. Q3 Asian cocoa grindings plummeted -17% year-over-year to a 9-year low, while European grindings fell -4.8% to a 10-year low. North American chocolate candy sales volume also declined over -21% in the 13 weeks ending September 7, underscoring broad-based consumer demand weakness likely exacerbated by previously high cocoa prices.

Key Decisions for Investors

• Investors should consider the implications of a projected 2024/25 global cocoa surplus, potentially leading to further price weakness.
• Monitor demand-side indicators, particularly Q4 grindings data and chocolate sales volumes, for signs of recovery or continued contraction.
• Evaluate existing long positions for potential downside risk and consider hedging strategies given the bearish supply and demand outlook.