Cocoa Prices Sharply Higher on Reduced Ivory Coast Cocoa Exports

Cocoa prices rose sharply Tuesday, driven by concerns over tightening supplies from the Ivory Coast due to slowing exports and quality issues with the mid-crop harvest, which is estimated to be down 9% year-over-year. Despite recent rains, drought conditions persist in key West African growing regions, further supporting prices. While cocoa inventories have rebounded from recent lows, concerns remain about waning consumer demand due to high prices and potential tariff impacts, as evidenced by recent sales declines from major chocolate manufacturers like Barry Callebaut and Hershey.

Analysis

Cocoa futures (CCN25, CAN25) surged, with NY cocoa closing up 3.18% and London cocoa up 2.39%, primarily driven by escalating concerns over West African supply. Ivory Coast export growth has decelerated significantly, from a +35% year-over-year increase seen in December to +6.7% for the period October 1 to June 1, signaling tightening future availability. Compounding these concerns are persistent drought conditions affecting over a third of Ghana and Ivory Coast, and significant quality issues with the Ivory Coast's mid-crop, where processors report rejecting beans due to 5-6% poor quality content, substantially higher than the typical 1% for the main crop. This mid-crop is anticipated to be 9% smaller year-over-year at 400,000 MT. Further underpinning bullish sentiment, Ghana's 2024/25 harvest forecast was revised down by 5%, and the International Cocoa Organization (ICCO) widened its 2023/24 global deficit estimate to -494,000 MT, the largest in over six decades, with the stocks-to-grindings ratio at a 46-year low of 27.0%. However, bearish pressures exist: ICE-monitored cocoa inventories in US ports have rebounded to an 8.5-month high, and major chocolate manufacturers like Barry Callebaut, Hershey (Q1 sales -14%), and Mondelez (weaker Q1 sales) report waning consumer demand and anticipate impacts from high prices and potential tariffs. While Q1 global cocoa grindings declined less than feared (e.g., North America -2.5% y/y vs. -5% expected), the ICCO forecasts a return to a global surplus of 142,000 MT for 2024/25, with production projected to rise 7.8% y/y, potentially capping long-term price gains.

Key Decisions for Investors

• Investors should closely monitor West African weather developments and Ivory Coast mid-crop quality reports, as these factors are significant near-term drivers for cocoa prices.
• Given the reported sales declines and tariff concerns impacting chocolate manufacturers such as Hershey (HSY) and Mondelez (MDLZ), it is prudent to reassess exposure to these companies and consider the potential for continued margin pressure and negative stock sentiment.
• Factor in the International Cocoa Organization's projection of a global surplus and production increase for the 2024/25 season, which may moderate long-term price appreciation despite current supply tightness, warranting a cautious stance on extended bullish cocoa positions.