Cocoa Prices Rebound as ICE Inventories Dwindle

Cocoa prices recovered from recent lows on Wednesday, supported by shrinking ICE inventories at a 7-month low and a weaker British pound, alongside the International Cocoa Organization's (ICCO) revised 2023/24 global deficit of 494,000 MT, the largest in over 60 years. However, gains were tempered by expectations of a 2024/25 global surplus of 142,000 MT, favorable West African weather forecasts, and significant Q3 declines in cocoa grindings across Asia (-17% y/y) and Europe (-4.8% y/y), indicating softening global demand. This creates a mixed market outlook, balancing current supply tightness with potential future oversupply and demand concerns.

Analysis

Cocoa prices (ICE NY +0.70%, London +1.46%) rebounded from 1-week lows on Wednesday, primarily supported by shrinking ICE-monitored US port inventories, which reached a 7-month low of 1,837,670 bags. The weaker British pound, falling to a 2.75-month low, also provided a tailwind for London cocoa priced in sterling. This immediate recovery contrasts with earlier declines driven by expectations of a global surplus.

The International Cocoa Organization (ICCO) revised its 2023/24 global deficit to a 60-year high of -494,000 MT, with production down -13.1% and stocks-to-grindings at a 46-year low of 27.0%. Conversely, ICCO projects a 142,000 MT global surplus for 2024/25, the first in four years, supported by favorable West African weather forecasts and a 7% increase in cocoa pod counts above the five-year average.

Global demand remains a significant headwind, with Q3 Asia cocoa grindings falling -17% y/y to a 9-year low and European grindings declining -4.8% y/y to a 10-year low. North American chocolate sales volume also decreased by over -21% in the 13 weeks ending September 7, indicating consumer resistance to high prices and tariffs. This broad-based demand contraction, alongside surging Ghana deliveries, suggests persistent bearish pressure.

Key Decisions for Investors

• Monitor the evolving supply-demand dynamics, particularly the transition from the 2023/24 deficit to the projected 2024/25 surplus, and actual West African harvest outcomes.
• Assess the elasticity of global cocoa demand, given the significant Q3 grindings declines in Asia and Europe, and the -21% drop in North American chocolate sales volumes.
• Consider the impact of currency fluctuations, specifically the British pound's weakness, on London cocoa prices and related trading strategies.
• Evaluate the potential margin pressure on chocolate manufacturers like Mondelez (MDLZ) due to sustained high cocoa prices and weakening consumer demand for finished products.