Adverse Weather in West Africa and Tighter Inventories Boost Cocoa Prices

Cocoa prices rallied on Tuesday, recovering from 1.5-month lows with December NY cocoa up over 2%, driven by short covering amidst West African weather concerns impacting supply and a decline in ICE-monitored US port inventories to a 3.75-month low. This rebound occurred despite persistent demand weakness, highlighted by chocolate makers lowering guidance and significant Q2 declines in European and Asian cocoa grindings. While the International Cocoa Organization (ICCO) revised the 2023/24 global deficit to a 60-year high of -494,000 MT, supporting current prices, their forecast for a 2024/25 surplus of 142,000 MT suggests potential long-term price moderation.

Analysis

The cocoa market is exhibiting significant tension between near-term supply constraints and a deteriorating long-term demand and supply outlook. Prices rallied sharply on Tuesday, with December NY cocoa (CCZ25) closing up 2.21%, driven by short covering on the back of adverse weather in West Africa. Heavy rains in the Ivory Coast are disrupting farmer activity and logistics, while dryness in Ghana and Nigeria threatens crop health. This is compounded by tightening physical inventories, with ICE-monitored stocks in US ports falling to a 3.75-month low. However, these bullish factors are set against a backdrop of pronounced demand destruction. Major chocolate manufacturers like Lindt & Sprüngli and Barry Callebaut have lowered guidance, with the latter reporting a -9.5% sales volume drop in its March-May period, the largest quarterly decline in a decade. This weakness is confirmed by significant year-over-year declines in Q2 cocoa grindings in Europe (-7.2%) and Asia (-16.3%). Furthermore, the long-term supply picture appears to be improving. Mondelez reported West African cocoa pod counts are 7% above the five-year average, and the International Cocoa Organization (ICCO), despite confirming a record deficit of -494,000 MT for 2023/24, forecasts a market surplus of 142,000 MT for 2024/25, the first in four years, on the back of a projected 7.8% rise in global production.

Key Decisions for Investors

• Investors should recognize the market dichotomy, where short-term supply disruptions in West Africa and low inventories support bullish tactical positions, while a weakening demand outlook and a forecasted 2024/25 surplus introduce significant long-term bearish risk.
• Closely monitor leading indicators of demand, such as upcoming quarterly cocoa grinding data and guidance from major chocolate manufacturers, as persistent weakness could cap any supply-driven rallies and signal a turn in the market.
• Consider the structural market shift implied by the ICCO's forecast for the first surplus in four years for 2024/25, which challenges the multi-year deficit narrative and may warrant reducing long-term bullish exposure or considering bearish strategies for forward contract months.
• Given the divergence between short-term supply shocks and deteriorating long-term fundamentals, expect heightened price volatility and employ stringent risk management, as sharp price reversals are increasingly probable.