Cocoa Prices Plummet as West African Cocoa Crop Prospects Improve

Cocoa prices are declining, with NY cocoa hitting a 2-week low and London cocoa a 3-week low, driven by favorable West African weather forecasts and rebounding US cocoa inventories, which reached an 8-month high. Countering this pressure are concerns about the quality of the Ivory Coast's mid-crop and slowing Ivory Coast cocoa exports, signaling potential supply constraints; additionally, fears of weakening consumer demand due to high prices and tariffs are weighing on the market, as evidenced by Barry Callebaut's sales guidance cut and Hershey's Q1 sales decline.

Analysis

Cocoa prices are experiencing a significant near-term selloff, with July ICE NY cocoa (CCN25) falling -5.03% to a 2-week low and July ICE London cocoa #7 (CAN25) declining -4.37% to a 3-week low, primarily driven by favorable weather forecasts in West Africa expected to benefit crop development. This bearish sentiment is amplified by a rebound in ICE-monitored cocoa inventories in US ports, which climbed to an 8-month high of 2,187,668 bags on Wednesday after hitting a 21-year low of 1,263,493 bags on January 24. However, several factors provide underlying support and suggest potential for price volatility. The pace of Ivory Coast cocoa exports, while up +9.6% year-to-date for the current marketing year (October 1 - May 25), has slowed considerably from the +35% increase seen in December, hinting at tightening future supplies. Persistent drought conditions still affect over a third of Ghana and Ivory Coast, according to the African Flood and Drought Monitor, and significant quality concerns plague the Ivory Coast's mid-crop, with processors reportedly rejecting beans due to 5-6% poor quality, well above the 1% norm for the main crop; Rabobank attributes this to late-arriving rain. The Ivory Coast mid-crop, currently being harvested, is estimated at 400,000 MT, down -9% year-over-year from 440,000 MT. Further supporting prices, Ghana's Cocobod cut its 2024/25 cocoa harvest forecast for the second time to 617,500 MT, down -5% from an August estimate. 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% y/y to 4.380 MMT and a 46-year low stocks/grindings ratio of 27.0%. On the demand side, pressures are mixed. Concerns over waning consumer demand due to high prices and potential tariffs are evident, with Barry Callebaut cutting its annual sales guidance, The Hershey Company (HSY) reporting a 14% Q1 sales decline and anticipating $15-$20 million in Q2 tariff costs, and Mondelez International (MDLZ) citing weaker-than-expected Q1 sales due to consumer cutbacks. Conversely, Q1 global cocoa grindings in North America (-2.5% y/y), Europe (-3.7% y/y), and Asia (-3.4% y/y) declined less than anticipated (expectations were for at least -5% falls), suggesting some resilience. Looking ahead, the ICCO forecasts a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with production projected to rise +7.8% y/y to 4.84 MMT, which, if realized, could weigh on prices long-term. The current market reflects a complex interplay between immediate weather-driven optimism and inventory recovery against persistent structural supply issues and uncertain demand elasticity.

Key Decisions for Investors

• Given the conflicting signals of improved near-term weather and inventory levels against ongoing structural supply concerns (quality, export pace, deficits) and mixed demand indicators, investors should prepare for continued significant price volatility in cocoa futures markets.
• Closely monitor West African weather developments, Ivory Coast export figures and mid-crop quality reports, and global inventory levels, as these will be key short-term price drivers influencing market direction.
• Evaluate exposure to chocolate manufacturers such as The Hershey Company (HSY) and Mondelez International (MDLZ) with caution, considering their reported Q1 sales weaknesses and the potential for further demand erosion from sustained high cocoa prices and tariff impacts.
• Factor in the International Cocoa Organization's 2024/25 global surplus forecast as a potential medium-term bearish catalyst for cocoa prices, should the projected +7.8% y/y production increase materialize, which would contrast sharply with the current historic deficit.