West African Rain Benefits Cocoa Crops and Undercut Prices

Cocoa prices declined Tuesday after an early rally, pressured by forecasts of beneficial rainfall in West Africa despite ongoing drought conditions in parts of Ghana and the Ivory Coast. Concerns over Ivory Coast mid-crop quality and slowing cocoa exports initially supported prices, but rising ICE-monitored cocoa inventories in U.S. ports and worries about weakening consumer demand due to high prices and potential tariffs weighed on the market, overshadowing the ICCO's revised estimate of a significant global cocoa deficit for 2023/24.

Analysis

Cocoa prices experienced a notable downturn, with July ICE NY cocoa (CCN25) closing down 0.92% and July ICE London cocoa #7 (CAN25) falling 1.71%, reversing an earlier rally. This price pressure stemmed predominantly from forecasts of beneficial rainfall in West Africa, which is anticipated to aid cocoa crop development, despite ongoing drought conditions that still affect over a third of Ghana and the Ivory Coast. While initial support for prices arose from concerns over a decelerating pace of cocoa exports from the Ivory Coast (shipments up +6.4% year-to-date from October 1 to June 15, a significant slowdown from the +35% increase seen in December) and an 11% year-over-year decline in Nigerian April cocoa exports, these factors were ultimately overshadowed. Bearish sentiment was reinforced by a significant rebound in ICE-monitored cocoa inventories in U.S. ports, which climbed to a 9-month high of 2,310,539 bags. Critically, substantial evidence indicates weakening consumer demand for cocoa products. Major chocolate manufacturers Hershey (HSY) and Mondelez (MDLZ) reported challenging Q1 results; HSY saw sales fall by 14% and anticipates $15-$20 million in tariff-related costs in Q2, while MDLZ noted consumers cutting back on snack purchases. This demand deterioration is further evidenced by declines in Q1 cocoa grindings: -2.5% y/y in North America, -3.7% y/y in Europe, and -3.4% y/y in Asia. Although the International Cocoa Organization (ICCO) recently revised its 2023/24 global cocoa deficit to a substantial -494,000 MT, the largest in over 60 years, and reported the global cocoa stocks/grindings ratio at a 46-year low of 27.0%, the market appears more focused on immediate weather improvements in West Africa and the clear signs of demand destruction. Concerns about the quality of the Ivory Coast's mid-crop, expected to be down 9% y/y with 5-6% of beans reportedly rejected, add complexity but are not currently outweighing the broader bearish pressures. The ICCO's preliminary forecast for a 142,000 MT global cocoa surplus in 2024/25, the first in four years, also contributes to a more cautious market outlook.

Key Decisions for Investors

• Investors should closely monitor West African weather developments, as rainfall patterns are a key short-term price determinant, while remaining aware that the significant 2023/24 supply deficit and Ivory Coast mid-crop quality issues could offer price support if weather improvements falter.
• Scrutinize upcoming Q2 global cocoa grinding data and forward guidance from major confectioners like HSY and MDLZ for further insights into the persistence and depth of consumer demand weakness, which is currently a dominant bearish factor.
• Consider the current market dynamics where a historically tight 2023/24 supply situation (ICCO deficit -494,000 MT, stocks/grindings at 27.0%) is being counteracted by immediate bearish elements such as weather relief, evident demand destruction, and a projected 2024/25 surplus; this suggests continued price volatility and warrants a cautious approach to new long positions until demand stabilizes or the 2024/25 supply outlook becomes less certain.