Cocoa Prices Undercut by Possible US Tariff Cuts and Ample Global Supplies

Cocoa prices recently fell to 1.75-year lows, extending a sell-off primarily driven by expectations of potential U.S. tariff cuts on non-domestic crops and forecasts for a bumper West African harvest, with Mondelez reporting pod counts 7% above the five-year average. This bearish sentiment is further exacerbated by weak global demand, evidenced by disappointing Halloween chocolate sales, significant Q3 cocoa grinding declines in Asia and Europe, and the International Cocoa Organization's (ICCO) projection of a 142,000 MT global surplus for 2024/25, marking the first surplus in four years. While factors like declining Ivory Coast exports, shrinking ICE inventories, and upcoming inclusion in the Bloomberg Commodity Index offer some underlying support, the immediate market outlook is dominated by increased supply expectations and softening demand.

Analysis

Cocoa prices have recently plummeted to 1.75-year lows, extending a significant sell-off driven by multiple bearish catalysts. Expectations of potential U.S. tariff cuts on non-domestic crops, following Treasury Secretary Bessent's remarks, are weighing heavily on the market. Concurrently, forecasts for a bumper West African cocoa harvest, with Mondelez reporting pod counts 7% above the five-year average, are contributing to increased supply expectations.

Further exacerbating the bearish sentiment is a pronounced weakness in global cocoa demand. Hershey's CEO reported "disappointing" Halloween chocolate sales, a period accounting for nearly 18% of annual U.S. candy sales. This demand slump is corroborated by significant Q3 grinding declines: Asia saw a -17% year-over-year drop to a 9-year low, and Europe experienced a -4.8% decline to a 10-year low. The International Cocoa Organization (ICCO) projects a 142,000 MT global surplus for 2024/25, marking the first surplus in four years, reinforcing the oversupply narrative.

Despite the prevailing bearish trend, several factors offer underlying support to cocoa prices. The upcoming inclusion of cocoa in the Bloomberg Commodity Index (BCOM) in January is anticipated to trigger approximately $1.9 billion in passive fund inflows. Additionally, government data indicates a -9% year-over-year decline in Ivory Coast cocoa exports, while ICE-monitored inventories in U.S. ports have fallen to a 7.75-month low. Projected -11% year-over-year production decline in Nigeria for 2025/26 also provides some long-term price support.

Key Decisions for Investors

• Investors should closely monitor the actual implementation and scope of potential U.S. tariff reductions, as well as the progression of the West African harvest for supply-side clarity.
• Evaluate the impact of the Bloomberg Commodity Index inclusion on cocoa futures, considering the potential for significant passive fund inflows against the backdrop of increasing supply and weakening demand.
• Consider hedging strategies or short-term positions given the immediate bearish pressures from demand weakness and surplus forecasts, while acknowledging long-term support from inventory drawdowns and potential index-driven buying.