Cocoa Prices Extend Their Slump as Supply Fears Fade

Cocoa prices have fallen to a 20-month low, primarily driven by expectations of increased supply and weakening global demand. Governments in Ivory Coast and Ghana have raised farmer pay, anticipating a boost in cocoa supplies, while major chocolate manufacturers like Lindt and Barry Callebaut report significant sales declines due to persistently high prices, signaling demand destruction. Further bearish pressure comes from an improved Ivory Coast crop outlook, surging Ghana deliveries, and substantial year-over-year drops in Q2 European and Asian cocoa grindings. Despite some supportive factors like tight US inventories and a record 2023/24 deficit, the International Cocoa Organization's forecast for a 2024/25 global surplus, the first in four years, reinforces the prevailing bearish sentiment.

Analysis

Cocoa prices, specifically December ICE NY cocoa and London cocoa, closed down -1.63% and -1.67% respectively, with NY cocoa sinking to a 20-month nearest-futures low. This decline is primarily driven by expectations of increased supply from West Africa and significant demand destruction. Governments in Ivory Coast and Ghana have increased farmer pay, anticipated to boost sales and cocoa supplies.

The supply outlook is largely bearish, with Mondelez reporting West African cocoa pod counts 7% above the five-year average. Ghana's port arrivals surged to 50,440 MT in the four weeks ending September 4, a substantial increase from 11,000 MT last year. However, some counter-support exists from a projected -9% decline in Ivory Coast's mid-crop to 400,000 MT and an -11% y/y fall in Nigeria's 2025/26 production.

High cocoa prices have significantly impacted demand, leading Lindt & Sprüngli to lower margin guidance and Barry Callebaut to reduce sales volume guidance twice, reporting a -9.5% Q1 sales volume drop. Q2 European and Asian cocoa grindings fell -7.2% and -16.3% year-over-year, respectively, underscoring this demand weakness. Funds have also increased net-short positions in London cocoa to a three-year high of 10,771, indicating strong bearish sentiment.

Despite a record 2023/24 global cocoa deficit of -494,000 MT, the International Cocoa Organization (ICCO) forecasts a 2024/25 global surplus of 142,000 MT, the first in four years, driven by a projected 7.8% y/y production increase. While US port inventories fell to a 5.75-month low of 1,894,850 bags, this localized tightness is overshadowed by the broader supply and demand dynamics.

Key Decisions for Investors

• Investors should consider the prevailing bearish sentiment driven by anticipated supply increases and confirmed demand destruction in the cocoa market.
• Monitor the ICCO's 2024/25 surplus forecast as a key indicator of market rebalancing, which could sustain downward pressure on prices.
• Be aware of potential short-covering rallies, given the elevated net-short positions by funds, which could introduce volatility despite the overall bearish trend.