Cocoa Prices Continue Lower on Outlook for Higher Cocoa Output in Ghana

Cocoa prices extended their selloff on Thursday, hitting multi-month lows, primarily driven by an improving supply outlook and weakening demand. Bearish factors include Ghana's projected 8.3% increase in its 2025/26 crop and rising US cocoa inventories. Concurrently, major chocolate manufacturers reported reduced sales and anticipated tariff costs due to high prices, contributing to a notable decline in Q1 global cocoa grindings. While the International Cocoa Organization (ICCO) revised the 2023/24 global deficit to a 60-year high of -494,000 MT, it also forecasts a 142,000 MT surplus for 2024/25, signaling a significant shift in market fundamentals despite ongoing quality and weather concerns in West Africa.

Analysis

Cocoa futures are experiencing a significant selloff, with NY cocoa hitting a 2.5-month low and London cocoa a 7.5-month low, reflecting a shift in market sentiment towards an improving supply outlook and clear signs of demand destruction. The primary bearish catalyst is the Ghana Cocoa Board's projection for an 8.3% year-over-year increase in its 2025/26 crop to 650,000 MT. This is compounded by rising ICE-monitored inventories in US ports, which are near a 9.75-month high. However, significant supply-side risks persist; Ivory Coast farmer shipments, while up 6.8% for the marketing year, have slowed dramatically from the 35% increase seen in December, and its mid-crop is forecast to be down 9% y/y. More critically, processors are reporting quality issues with 5-6% of the Ivory Coast's mid-crop being rejected. On the demand side, evidence of destruction is mounting. Major confectioners like Hershey (HSY) and Mondelez (MDLZ) reported significant sales declines of 14% and weaker-than-expected results, respectively, in Q1, citing high prices. This is corroborated by contracting Q1 cocoa grindings in North America (-2.5%), Europe (-3.7%), and Asia (-3.4%). While the International Cocoa Organization (ICCO) recently revised the 2023/24 global deficit to a 60-year high of -494,000 MT, the market is now pricing in the ICCO's forecast for a 142,000 MT surplus in 2024/25, the first in four years, suggesting the current price pressure is forward-looking.

Key Decisions for Investors

• Given the confluence of a projected 2024/25 supply surplus and clear evidence of demand destruction from falling global grindings and weak confectioner sales, investors may consider maintaining a bearish or underweight stance on cocoa futures.
• Despite the bearish outlook, traders should closely monitor near-term supply developments in West Africa, as persistent quality issues, harvest disruptions from heavy rain, or a worsening of drought conditions could trigger short-term price volatility and challenge the recovery narrative.
• For equity investors, the negative reports from Hershey and Mondelez, including a 14% Q1 sales drop for HSY and tariff-related cost warnings, signal continued margin pressure and revenue headwinds for chocolate manufacturers, warranting caution on the sector.
• Forward-looking guidance from the ICCO and West African cocoa boards will be critical indicators, as the market is currently weighing future supply recovery more heavily than the immediate historic deficit.