Cocoa Prices Fall on Beneficial Rain in West Africa

Cocoa prices are declining, hitting 2-week lows, driven by forecasts of favorable rain in West Africa which is expected to aid crop development. Despite this, prices are supported by slowing Ivory Coast exports and concerns about the quality of the Ivory Coast mid-crop, with processors reporting a higher percentage of poor-quality beans. Concerns about consumer demand due to high prices and potential tariffs are also weighing on the market, with Barry Callebaut and Hershey reporting sales declines, though recent data indicates better-than-expected global cocoa demand.

Analysis

Cocoa prices are currently experiencing downward pressure, with July ICE NY cocoa down -0.81% and London cocoa down -0.24% to two-week lows, primarily due to forecasts of beneficial rainfall in West Africa expected to aid crop development. This bearish sentiment is further reinforced by a rebound in ICE-monitored US port inventories, which have climbed to an 8-month high of 2,187,574 bags since hitting a 21-year low in January. However, several factors provide underlying support for prices, including a slowing pace of Ivory Coast cocoa exports (up +9.6% year-to-date versus +35% in December), significant quality concerns regarding the Ivory Coast mid-crop where processors report 5-6% poor quality beans compared to 1% in the main crop, and a reduced 2024/25 harvest forecast from Ghana (down -5% to 617,500 MT). Demand-side signals are mixed: major chocolate manufacturers like Barry Callebaut, Hershey (Q1 sales -14%, anticipating $15-$20 million in Q2 tariff costs), and Mondelez (weaker Q1 sales) report waning consumer demand due to high prices and potential tariff impacts. Conversely, Q1 global cocoa grindings in North America (-2.5% y/y), Europe (-3.7% y/y), and Asia (-3.4% y/y) declined less than anticipated, suggesting some demand resilience. The International Cocoa Organization (ICCO) highlights a significant 2023/24 global cocoa deficit of -441,000 MT, the largest in over 60 years with production down -13.1% y/y and the stocks/grindings ratio at a 46-year low of 27.0%. Critically, the ICCO also forecasts a pivotal shift to a global surplus of 142,000 MT for 2024/25, predicated on a +7.8% y/y rise in global production, introducing considerable uncertainty to the medium-term outlook.

Key Decisions for Investors

• Investors should anticipate continued volatility in cocoa futures given the conflicting signals between immediate weather-driven supply relief and inventory builds versus underlying support from structural supply issues like crop quality and reduced production forecasts.
• Closely monitor upcoming West African rainfall data and its actual impact on crop development, Ivory Coast mid-crop quality assessments, and further updates to global supply/demand balances, particularly the realization of the ICCO's forecasted 2024/25 surplus.
• For equities such as Hershey (HSY) and Mondelez (MDLZ), the sustained high cocoa input costs and confirmed consumer demand erosion present significant headwinds, warranting scrutiny of their mitigation strategies and margin outlooks.