Cocoa Prices Rally Sharply on Dollar Weakness

Cocoa prices rose sharply Thursday, driven by a weaker dollar and signs of declining Nigerian cocoa exports (-11% y/y in April), despite recent pressure from improving West African rainfall forecasts. Concerns persist regarding the quality of the Ivory Coast's mid-crop and the potential impact of tariffs on consumer demand, as evidenced by reduced sales guidance from Barry Callebaut and weaker-than-expected sales from Hershey and Mondelez; however, the ICCO's revised global cocoa deficit for 2023/24 remains historically large, supporting underlying prices.

Analysis

Cocoa prices experienced a significant rally, with July ICE NY cocoa (CCN25) closing up +3.24%, primarily driven by a 0.70% decline in the U.S. dollar index to a 3-1/4 year low and supportive export data showing Nigerian April cocoa exports fell -11% year-over-year to 18,561 MT. However, gains in London cocoa (CAN25, +1.20%) were moderated by a stronger British pound, which reached a 3-1/4 year high. This price surge contrasts with recent downward pressure from forecasts of beneficial rainfall in West Africa and a rebound in ICE-monitored U.S. port inventories to an 8-3/4 month high of 2,269,384 bags. Underlying support for cocoa prices stems from persistent supply-side issues: Ivory Coast farmer shipments, while up +7.2% year-to-date through June 8, have slowed considerably from the +35% increase seen in December. Furthermore, drought still affects over a third of Ghana and the Ivory Coast, and significant quality concerns plague the Ivory Coast's mid-crop, with processors reporting 5-6% poor quality beans and an anticipated -9% year-over-year decline in mid-crop output to 400,000 MT. The International Cocoa Organization (ICCO) amplified these supply concerns by revising its 2023/24 global cocoa deficit to -494,000 MT, the largest in over 60 years, with production down -13.1% year-over-year and the global stocks/grindings ratio at a 46-year low of 27.0%. Conversely, demand-side headwinds are intensifying. Major chocolate manufacturers like Barry Callebaut, Hershey (HSY), and Mondelez (MDLZ) have reported or guided for weaker sales, citing high cocoa prices and tariff uncertainties; Hershey's Q1 sales fell -14% and it anticipates $15-$20 million in Q2 tariff costs, while Mondelez noted consumer cutbacks. This is corroborated by declining Q1 cocoa grindings in North America (-2.5% y/y), Europe (-3.7% y/y), and Asia (-3.4% y/y). Looking 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% y/y, potentially alleviating the current tightness. The market thus presents a mixed sentiment, balancing severe current supply constraints and quality issues against emerging demand destruction and a more optimistic supply outlook for the next season.

Key Decisions for Investors

• Investors should closely monitor West African weather developments, cocoa export figures from key producing nations, and currency fluctuations, particularly the USD and GBP, as these are proving to be significant short-term price catalysts.
• Consider the dichotomy between the severe 2023/24 supply deficit and Ivory Coast mid-crop quality issues, which provide near-term price support, against the ICCO's forecast of a 2024/25 surplus and rising production, which may cap long-term upside.
• Evaluate exposure to chocolate manufacturers such as Hershey (HSY) and Mondelez (MDLZ), which are signaling demand destruction through reduced sales and guidance, directly impacted by high cocoa input costs and potential tariffs, as reflected in their negative per-ticker sentiment.
• Given the extremely tight current supply fundamentals evidenced by the record deficit and 46-year low stocks-to-grindings ratio, further price spikes are possible; however, emerging demand weakness and a projected 2024/25 supply recovery warrant caution and active risk management for long cocoa positions.