Dollar Weakness Spurs Short Covering in Cocoa Futures

Cocoa prices are rising, driven by dollar weakness and concerns over tightening supplies from the Ivory Coast, where exports are slowing and mid-crop quality is reportedly poor with processors rejecting bean shipments. Despite recent rains, drought conditions persist in key West African growing regions. Bearish factors include rebounding cocoa inventories in U.S. ports and concerns about waning consumer demand due to high prices and potential tariffs, as evidenced by Barry Callebaut's sales guidance cut and Hershey's Q1 sales decline; however, better-than-expected Q1 cocoa grindings in North America, Europe, and Asia are providing some support.

Analysis

Cocoa prices are exhibiting upward momentum, with July ICE NY cocoa (CCN25) increasing by +1.37% and July ICE London cocoa (CAN25) by +0.77%, primarily driven by US dollar weakness inducing short covering. However, gains in London are tempered by a strengthening British pound (^GBPUSD), which rose to a 1-week high. Significant supply-side concerns underpin current prices: Ivory Coast cocoa exports, while up +6.7% year-to-date as of June 1 (1.6 MMT), have decelerated from a +35% increase seen in December, signaling tightening future supplies. Persistent drought conditions affect over a third of Ghana and Ivory Coast, despite recent rains, raising alarms for crop health. Quality issues with the Ivory Coast's mid-crop, currently being harvested, are exacerbating supply fears, with processors reportedly rejecting 5-6% of beans per truckload due to poor quality, a significant increase from the 1% typical for the main crop. Rabobank attributes this quality degradation to late rainfall. The Ivory Coast's mid-crop is estimated at 400,000 MT, down -9% year-over-year. Further supporting prices, Ghana's Cocobod has revised its 2024/25 cocoa harvest forecast downwards to 617,500 MT, a -5% reduction from August estimates. The International Cocoa Organization (ICCO) has amplified these concerns by widening its 2023/24 global cocoa deficit forecast to -494,000 MT, the largest in over 60 years, with 2023/24 production falling -13.1% year-over-year to 4.380 MMT and the global stocks/grindings ratio hitting a 46-year low of 27.0%. Conversely, bearish pressures exist. ICE-monitored cocoa inventories in US ports have rebounded to an 8.5-month high of 2,217,925 bags, recovering from a 21-year low. Consumer demand is a key concern, with fears that high prices and potential tariffs will dampen consumption. Barry Callebaut AG has cut its annual sales guidance, The Hershey Company (HSY) reported a -14% Q1 sales decline and anticipates $15-$20 million in Q2 tariff costs, and Mondelez International (MDLZ) noted weaker-than-expected Q1 sales due to consumer cutbacks. Despite these demand anxieties, Q1 global cocoa grindings were better than anticipated: North American grindings fell -2.5% (expected -5%), European -3.7% (expected -5%), and Asian -3.4% (expected -5%). Looking ahead, 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% year-over-year, presenting a mixed long-term outlook against current tightness.

Key Decisions for Investors

• Investors should acknowledge the current mixed signals in the cocoa market, with tight near-term supply and a significant 2023/24 deficit contrasting with rebounding US inventories and a projected 2024/25 surplus.
• Closely monitor West African weather developments, mid-crop quality reports from Ivory Coast, and export figures, as these will be critical drivers for short-term price volatility.
• For equity investors in chocolate manufacturers such as Hershey (HSY) and Mondelez (MDLZ), continue to assess the impact of high cocoa input costs and potential for further demand erosion on margins and sales volumes, as evidenced by recent negative company reports.
• Factor in currency market fluctuations, particularly the USD and GBP, which are directly influencing cocoa futures pricing and creating arbitrage conditions.
• Consider the ICCO's forecast for a 2024/25 surplus as a potential medium-term cap on prices, contingent on materialization of the projected +7.8% YOY production increase.