Cocoa Prices Sink on Robust Supplies and Tepid Demand

Cocoa prices are experiencing a significant slump, with NY cocoa hitting a 20-month low, driven by expectations of increased supplies from Ivory Coast and Ghana following higher farmer payments and an improved crop outlook. This bearish sentiment is exacerbated by weakening global demand, as evidenced by major chocolate makers like Lindt & Sprüngli and Barry Callebaut lowering guidance due to high prices, and declining cocoa grindings across Europe and Asia. While the International Cocoa Organization (ICCO) forecasts a 2024/25 global surplus, the market also faces underlying support from historically tight 2023/24 deficits, low US inventories, and a record net-short position by funds, which could trigger a short-covering rally.

Analysis

Cocoa prices are experiencing a significant slump, with NY cocoa reaching a 20-month low, driven by expectations of increased supply from West Africa. Higher farmer payments in Ivory Coast and Ghana, coupled with an optimistic Ivory Coast crop outlook (pod counts 7% above five-year average) and surging Ghana deliveries (50,440 MT vs. 11,000 MT last year), are contributing to this bearish pressure.

Weakening global demand further compounds the price decline. Chocolate makers like Lindt & Sprüngli and Barry Callebaut have lowered guidance due to declining sales, with Barry Callebaut reporting a -9.5% drop in Q2 sales, its largest in a decade. Q2 cocoa grindings in Europe (-7.2% y/y) and Asia (-16.3% y/y) confirm a significant contraction in consumption, indicating high prices are dampening demand.

However, several factors offer underlying support. The ICCO revised the 2023/24 global deficit to a 60-year high of -494,000 MT, with the stocks-to-grindings ratio at a 46-year low. ICE-monitored US cocoa inventories are also at a 5.5-month low, and quality concerns persist for the Ivory Coast's mid-crop, projected down -9% from last year.

Investor positioning presents a potential catalyst for volatility, with funds holding their largest net-short position in London cocoa in over three years (5,711 contracts). Despite the ICCO forecasting a 2024/25 surplus, this substantial short interest could trigger a sharp short-covering rally, creating upward price pressure amidst the current bearish fundamentals.

Key Decisions for Investors

• Investors should closely monitor the actual pace of cocoa arrivals from West Africa and updated demand indicators from chocolate manufacturers, given the current bearish sentiment.
• Consider the significant risk of a short-covering rally, as funds hold a multi-year high net-short position in London cocoa, which could trigger sharp upward price movements despite fundamental supply increases.
• Evaluate long-term positioning against the ICCO's forecasted 2024/25 surplus versus the historically tight 2023/24 deficit and low US inventories.