Cocoa Prices Settle Higher on Dollar Weakness and Slowing Ivory Coast Exports

Cocoa prices rose Monday, supported by a weaker dollar and concerns over tightening supplies from the Ivory Coast, where cocoa shipments are up 6.4% year-over-year but slowing from earlier gains. Despite rising ICE-monitored cocoa inventories, quality concerns regarding the Ivory Coast's mid-crop and drought conditions in West Africa persist, while concerns about consumer demand due to high prices and tariffs remain a bearish factor, as evidenced by reduced sales guidance from Barry Callebaut and weaker sales reported by Hershey and Mondelez.

Analysis

Cocoa prices experienced upward movement, supported by a weakening dollar index and emerging signs of tightening future supplies. Specifically, Ivory Coast cocoa shipments, while up 6.4% year-to-date through June 15, demonstrate a decelerating growth rate from the 35% increase seen in December, and Nigerian April exports declined 11% year-over-year to 18,561 MT. Compounding supply concerns are persistent drought conditions affecting over a third of Ghana and the Ivory Coast, and significant quality issues with the Ivory Coast's mid-crop, where processors report 5-6% poor quality beans and an anticipated 9% year-over-year reduction in this crop's volume to 400,000 MT. The International Cocoa Organization (ICCO) has amplified these supply concerns by revising its 2023/24 global cocoa deficit estimate to -494,000 MT, the largest in over six decades, with production projected to fall 13.1% year-over-year and the stocks-to-grindings ratio at a 46-year low of 27.0%. However, these bullish supply signals are partially offset by a rebound in ICE-monitored cocoa inventories held in US ports to a 9-month high of 2,307,118 bags. On the demand side, significant headwinds are apparent: major chocolate manufacturers like Barry Callebaut (reduced annual sales guidance), Hershey (Q1 sales down 14%, anticipating $15-$20 million in Q2 tariff costs), and Mondelez International (weaker-than-expected Q1 sales) report consumer pullback due to high prices and tariff uncertainties. This is corroborated by Q1 cocoa grindings, which fell across North America (-2.5% y/y), Europe (-3.7% y/y), and Asia (-3.4% y/y). Looking further ahead, the ICCO forecasts a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with production expected to rise 7.8%, potentially capping long-term price appreciation. The current market reflects a complex interplay between immediate supply tightness and growing evidence of demand destruction, alongside a more bearish supply outlook for the next crop year.

Key Decisions for Investors

• Investors should closely monitor West African weather patterns, Ivory Coast and Nigerian export data, and Ivory Coast mid-crop quality assessments for near-term cocoa price direction, recognizing the current acute supply tightness.
• Exercise caution regarding sustained cocoa price rallies due to significant consumer demand headwinds, evidenced by declining global grindings and negative sales reports from major confectioners like Hershey and Mondelez.
• Factor the ICCO's 2024/25 global surplus forecast (142,000 MT) and projected 7.8% production increase into medium-term strategies, as this suggests potential for price normalization.
• For equity investors, the reported Q1 sales declines and margin pressures for companies like Hershey (HSY) and Mondelez (MDLZ) due to high cocoa prices and tariff impacts warrant careful consideration of allocations within the consumer staples sector, particularly chocolate manufacturers.