Cocoa Prices Pressured by Ample Inventories

Cocoa prices are declining due to rising ICE-monitored inventories in US ports, which reached a 7 3/4-month high, and a stronger British pound, which negatively impacts cocoa futures priced in sterling. Despite recent rallies driven by concerns over Ivory Coast cocoa export slowdown and poor mid-crop quality, concerns about waning consumer demand due to high prices and potential tariffs are weighing on the market, as evidenced by Barry Callebaut's sales guidance cut and Hershey's Q1 sales decline.

Analysis

Cocoa prices are currently experiencing downward pressure, with July ICE NY cocoa down -0.67% and London cocoa down -2.45%, primarily attributed to signs of ample inventories as ICE-monitored US port stocks reached a 7-3/4 month high of 2,156,644 bags, and a strengthening British pound impacting sterling-denominated futures. This contrasts with a recent rally that saw NY cocoa hit a 3-1/2 month high driven by a slowing pace of Ivory Coast cocoa exports, which, while up +10.5% year-over-year as of May 18, represent a deceleration from the +35% increase seen in December. Significant supply-side concerns persist: the Ivory Coast mid-crop, estimated to be down -9% year-over-year at 400,000 MT, faces severe quality issues with 5-6% of beans being rejected, and over a third of Ghana and Ivory Coast remain affected by drought despite recent rains. Ghana has also cut its 2024/25 cocoa harvest forecast by -5% from an earlier estimate. These issues compound the International Cocoa Organization's (ICCO) reported 2023/24 global cocoa deficit of -441,000 MT, the largest in over 60 years, with the stocks-to-grindings ratio at a 46-year low of 27.0%. On the demand side, major chocolate manufacturers like Barry Callebaut AG (BRN) and Hershey Co. (HSY) are signaling headwinds; Barry Callebaut cut sales guidance, and Hershey reported a -14% Q1 sales decline, anticipating $15-$20 million in Q2 tariff costs. Mondelez International also noted consumer pullback due to economic uncertainty and high chocolate prices. However, Q1 cocoa grindings in North America (-2.5% YoY), Europe (-3.7% YoY), and Asia (-3.4% YoY) fell less than market expectations, suggesting some resilience in underlying demand. Looking forward, the ICCO projects a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with production expected to rise +7.8% YoY, potentially easing long-term supply tightness.

Key Decisions for Investors

• Investors should recognize the current dichotomy where rising short-term inventories and currency fluctuations are pressuring cocoa prices, while significant underlying supply constraints from West Africa, including poor crop quality and reduced forecasts, could provide future price support.
• Closely monitor upcoming West African weather patterns, Ivory Coast mid-crop harvest quality reports, and actual export figures, as these will be critical determinants of near-term supply reality versus current inventory levels.
• Evaluate the risk of demand destruction by tracking consumer goods companies' earnings, particularly chocolate manufacturers like Hershey Co. (HSY) and Barry Callebaut AG (BRN), for commentary on pricing power and volume impacts from sustained high cocoa prices and potential tariffs.
• Factor in the International Cocoa Organization's projection of a return to surplus in the 2024/25 season, which may cap long-term price appreciation if realized, suggesting a cautious stance on very long-dated bullish positions.