Cocoa Prices Settle Higher on Smaller Ivory Coast Cocoa Deliveries

Cocoa prices recently recovered from 1.5-week lows, driven by a 9% year-over-year decline in Ivory Coast cocoa exports and shrinking ICE inventories, alongside potential short-covering as funds hold a four-year high net-short position in London cocoa. While the International Cocoa Organization (ICCO) reported a record 60-year global deficit for 2023/24, it also projected a 2024/25 surplus amid expectations of a bumper West African crop and significant weakness in global chocolate demand, evidenced by declining sales and grinding figures across major regions. Further market support is anticipated from cocoa's inclusion in the Bloomberg Commodity Index in January, potentially attracting substantial passive fund inflows.

Analysis

Cocoa prices recovered from 1.5-week lows, with December ICE NY cocoa up +1.48%, driven by a 9% year-over-year decline in Ivory Coast exports and shrinking ICE inventories. The ICCO reported a record 2023/24 global deficit of -494,000 MT, contrasting with its projected 142,000 MT surplus for 2024/25, supported by expectations of a bumper West African crop. A four-year high net-short position in London cocoa (19,194 contracts) also suggests potential for a short-covering rally.

Global cocoa demand exhibits significant weakness, with North American chocolate candy sales volume down over -21% year-over-year and Hershey's reporting disappointing Halloween sales. Q3 cocoa grindings fell -17% in Asia (9-year low) and -4.8% in Europe (10-year low), indicating that high cocoa prices are dampening consumer demand and processing activity.

A major structural catalyst is cocoa's impending inclusion in the Bloomberg Commodity Index (BCOM) in January, its first in two decades. With BCOM assets totaling nearly $109 billion, cocoa's 1.7% weighting could trigger an estimated $1.9 billion in passive fund inflows into cocoa futures, potentially providing substantial price support.

Key Decisions for Investors

• Investors should monitor the estimated $1.9 billion in passive fund inflows into cocoa futures following its January inclusion in the Bloomberg Commodity Index, as this represents a significant non-fundamental price driver.
• Evaluate the elasticity of cocoa demand to price, given the substantial declines in chocolate sales and grindings across major regions, which indicate high prices are eroding consumption.
• Consider the potential for short-covering rallies, as funds hold a four-year high net-short position in London cocoa, which could offer tactical trading opportunities.
• Assess the long-term supply outlook, balancing the current record deficit with the projected 2024/25 surplus and optimistic West African crop reports for strategic positioning.