Cocoa Prices Pressured as the Global Supply Outlook Improves

Cocoa prices are mixed, with NY cocoa hitting a 20-month low, primarily pressured by expectations of increased West African supply following higher farmer payments and an improved crop outlook, alongside significant fund short positions and weakening global demand. However, London cocoa found support from a weaker British pound, while underlying factors like tight US inventories, quality issues with Ivory Coast's mid-crop, and projected production declines in Nigeria, coupled with a record 2023/24 global deficit, present a complex market dynamic despite forecasts for a 2024/25 surplus.

Analysis

Cocoa prices are exhibiting a mixed trend, with December ICE NY cocoa reaching a 20-month nearest-futures low, primarily driven by expectations of increased West African supply. This outlook stems from higher farmer payments in Ivory Coast and Ghana, alongside an improved crop forecast for Ivory Coast, which is expected to boost overall cocoa supplies. Conversely, December ICE London cocoa found support today from a weakening British pound, which fell to a two-month low.

Significant global demand weakness is a key bearish factor, evidenced by Q2 European cocoa grindings falling -7.2% year-over-year and Asian grindings declining -16.3% year-over-year, marking an eight-year low. Major chocolate manufacturers like Lindt & Sprüngli and Barry Callebaut have already lowered guidance and reported sales volume reductions, citing persistently high cocoa prices and dampened demand.

Despite the bearish supply outlook, underlying market dynamics present some supportive elements. ICE-monitored cocoa inventories in US ports have fallen to a 5.5-month low, and quality concerns persist for Ivory Coast's mid-crop, which is estimated down -9% year-over-year. Furthermore, Nigeria projects an -11% year-over-year decline in its 2025/26 cocoa production, adding to potential supply constraints.

Technically, funds have accumulated their largest net-short position in London cocoa in over three years, increasing by 2,935 to 5,711 contracts by September 30. This excessive short positioning could exacerbate any short-covering rally. While the 2023/24 global deficit was revised to a 60-year high of -494,000 MT, the ICCO forecasts a 2024/25 surplus of 142,000 MT, projecting a +7.8% increase in global production.

Key Decisions for Investors

• Monitor West African harvest progress and actual supply figures, especially from Ivory Coast and Ghana, as increased farmer payments and favorable crop outlooks could further pressure prices.
• Evaluate chocolate manufacturers' future guidance and sales volumes for signs of sustained demand elasticity, given recent reductions by Lindt & Sprüngli and Barry Callebaut.
• Consider the potential for a short-covering rally in London cocoa due to the historically high net-short positions held by funds, which could offer tactical trading opportunities.
• Assess the implications of the projected 2024/25 global surplus by ICCO against the current tight inventory levels and quality concerns, as this shift could redefine long-term price trends.