Cocoa Prices Supported by Dollar Weakness and Slowing Ivory Coast Cocoa Exports

Cocoa prices are rising, with NY cocoa reaching a 1-1/2 week high and London cocoa a 1-week high, driven by a weaker dollar and concerns over tightening supplies from the Ivory Coast due to slowing exports and poor mid-crop quality, where processors report 5-6% of beans are substandard compared to 1% during the main crop. Despite recent rains, drought conditions persist in key West African growing regions, supporting prices, though rebounding cocoa inventories in U.S. ports to an 8-1/2 month high and concerns about waning consumer demand due to tariffs and high prices pose bearish pressures, as evidenced by Barry Callebaut's sales guidance cut and Hershey's Q1 sales decline. The ICCO has revised its 2023/24 global cocoa deficit to -494,000 MT, the largest in over 60 years, while forecasting a surplus for 2024/25.

Analysis

Cocoa prices are exhibiting upward momentum, with NY cocoa attaining a 1-1/2 week high and London cocoa a 1-week high, significantly influenced by a weaker U.S. dollar which has encouraged short covering. Fundamental support stems from mounting supply-side concerns: Ivory Coast cocoa exports are decelerating, having increased only +6.7% year-to-date as of June 1 compared to a +35% rise reported in December. Furthermore, the Ivory Coast's mid-crop, which is projected to be 9% smaller year-over-year at 400,000 MT, is encountering quality issues, with processors rejecting 5-6% of beans, substantially higher than the typical 1% during the main crop. Persistent drought conditions across more than a third of Ghana and Ivory Coast, despite recent rainfall, and a reduced 2024/25 cocoa harvest forecast for Ghana (down -5% to 617,500 MT from an August estimate) further bolster prices. This situation is underscored by the International Cocoa Organization's (ICCO) revised 2023/24 global cocoa deficit of -494,000 MT, marking the largest deficit in over sixty years, and a stocks-to-grindings ratio at a 46-year low of 27.0%. Conversely, gains in London cocoa are being constrained by a strengthening British pound, and a notable rebound in ICE-monitored U.S. port inventories to an 8-1/2 month high introduces a bearish element. On the demand front, while Q1 global cocoa grindings in North America (-2.5% YoY), Europe (-3.7% YoY), and Asia (-3.4% YoY) declined less than market expectations, substantial concerns regarding consumer demand persist. Major chocolate manufacturers, including Barry Callebaut AG, Hershey Co. (which reported a 14% Q1 sales decline and anticipates $15-$20 million in Q2 tariff costs), and Mondelez International (which saw weaker-than-expected Q1 sales), indicate that high prices and tariff uncertainties are dampening consumption. Looking forward, the ICCO projects a global cocoa surplus of 142,000 MT for the 2024/25 season, the first anticipated surplus in four years, with global production forecast to increase by +7.8% year-over-year, suggesting a potential shift in the market's supply-demand balance.

Key Decisions for Investors

• Given current West African supply tightness and a depreciating U.S. dollar, short-term support for cocoa prices is apparent, however, caution is warranted due to the ICCO's forecast of a 2024/25 surplus and clear indications of demand erosion from leading confectionary companies.
• Investors should meticulously track West African weather developments, Ivory Coast mid-crop harvest progress and quality reports, and export volumes, as these factors will be crucial in determining near-term price trajectories and validating the anticipated supply recovery.
• For investments in consumer staples corporations with significant cocoa exposure, such as Hershey and Mondelez, a thorough assessment of potential ongoing margin compression and sales volume reductions due to sustained high cocoa prices and tariff impacts is advisable.
• The market presents a dichotomy between a severe current supply deficit and a projected surplus for 2024/25; this suggests that while tactical bullish opportunities may exist, long-term conviction should be predicated on tangible evidence of persistent production shortfalls extending beyond the current crop year.