Cocoa Prices Plummet on Improved Prospects for West African Cocoa Crop

Cocoa prices plummeted today, with July ICE NY cocoa down 4.22% and July ICE London cocoa down 6.41%, driven by forecasts of favorable rain in West Africa expected to aid crop development. The stronger British pound also weighed on London cocoa futures, and ICE-monitored cocoa inventories in US ports climbed to a 7-3/4 month high. Despite recent concerns about Ivory Coast cocoa quality and a projected global cocoa deficit for 2023/24, the ICCO forecasts a global cocoa surplus for 2024/25, further contributing to the price decline.

Analysis

Cocoa prices experienced a significant downturn, with July ICE NY cocoa falling -4.22% and July ICE London cocoa declining -6.41% to 1-1/2 week lows, primarily driven by forecasts for beneficial rainfall in West Africa, which is anticipated to support crop development in key growing regions. This bearish sentiment was amplified for London futures by a strengthening British pound, which reached a 3-1/4 year high, making sterling-denominated cocoa more expensive. Further pressure on prices stemmed from signs of increasing supply, as ICE-monitored cocoa inventories in US ports ascended to a 7-3/4 month high of 2,167,990 bags. Despite these immediate bearish factors, underlying market tightness persists; Ivory Coast cocoa exports, while up +10.5% year-to-date, have slowed from a +35% increase seen in December, signaling potentially tighter future supplies. Moreover, drought conditions continue to affect over a third of Ghana and Ivory Coast, and significant quality concerns plague the Ivory Coast's mid-crop, with processors rejecting 5-6% of beans due to poor quality, compared to 1% for the main crop, attributed to late rains. This mid-crop is forecast at 400,000 MT, a -9% decrease from last year. On the demand side, major chocolate manufacturers like Barry Callebaut, Hershey (Q1 sales down -14%, anticipating $15-$20 million in Q2 tariff costs), and Mondelez (weaker Q1 sales) have reported or signaled waning consumer demand due to high prices and economic uncertainty. However, Q1 global cocoa grindings, though lower year-over-year (North America -2.5%, Europe -3.7%, Asia -3.4%), surpassed expectations of steeper declines. The International Cocoa Organization (ICCO) highlighted a substantial 2023/24 global cocoa deficit of -441,000 MT, the largest in over 60 years, with production down -13.1% and the stocks-to-grindings ratio at a 46-year low of 27.0%. Conversely, 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% y/y, which contributes to the current price weakness.

Key Decisions for Investors

• Monitor West African weather developments and their impact on crop yields closely, as this remains a critical short-term price determinant for cocoa futures.
• Track ICE inventory levels and reports on Ivory Coast mid-crop quality and export pace, as these provide tangible evidence of supply dynamics.
• Evaluate exposure to chocolate manufacturers such as Hershey (HSY) and Mondelez (MDLZ) considering their reported sales slowdowns and the potential for continued margin pressure from high cocoa costs and tariff uncertainties.
• Consider the ICCO's forecast shift from a significant 2023/24 deficit to a projected 2024/25 surplus, which could signal a longer-term bearish trend for cocoa prices if production recovers as anticipated.
• Given the recent sharp price decline amidst mixed fundamental signals, adopt a cautious approach, potentially awaiting further clarity on weather outcomes and the actualization of the 2024/25 surplus before increasing long exposure.