Cocoa Prices Supported by a Slowdown in Ivory Coast Cocoa Exports

Cocoa prices are rising due to concerns about tighter supplies, evidenced by a slowing pace of Ivory Coast cocoa exports and quality issues with the mid-crop harvest, where processors are rejecting beans due to poor quality. Despite recent rains, drought conditions persist in key West African growing regions, further supporting prices. However, rising ICE-monitored cocoa inventories in U.S. ports and concerns about waning consumer demand due to high prices and potential tariffs present bearish factors, as highlighted by Barry Callebaut's sales guidance cut and Hershey's Q1 sales decline.

Analysis

Cocoa prices are experiencing upward pressure, with July ICE NY cocoa (CCN25) increasing by +3.10% and July ICE London cocoa (CAN25) by +2.07%, primarily driven by significant supply-side concerns. The slowing pace of Ivory Coast cocoa exports, which, while up +6.7% year-over-year from October 1 to June 1 at 1.6 MMT, have decelerated from a +35% year-over-year increase seen in December, signaling potential future tightness. Compounding this are persistent drought conditions affecting over a third of Ghana and Ivory Coast, and notable quality issues with the Ivory Coast's mid-crop, where processors report rejecting 5% to 6% of beans per truckload due to poor quality, compared to 1% during the main crop. This mid-crop is estimated at 400,000 MT, a -9% decrease from last year. Further supporting prices, Ghana's 2024/25 cocoa harvest forecast was cut to 617,500 MT, and the ICCO revised its 2023/24 global cocoa deficit to -494,000 MT, the largest in over 60 years, with production down -13.1% YoY and the stocks/grindings ratio at a 46-year low of 27.0%. However, countervailing bearish factors exist, including a rebound in ICE-monitored US port inventories to an 8.5-month high of 2,202,098 bags. More significantly, consumer demand is showing signs of weakening due to high prices and potential tariffs; Barry Callebaut AG reduced its annual sales guidance, Hershey Co. (HSY) reported a -14% Q1 sales decline and anticipates $15-$20 million in Q2 tariff costs, and Mondelez International (MDLZ) noted weaker Q1 sales as consumers cut back. While Q1 global cocoa grindings in North America (-2.5% YoY), Europe (-3.7% YoY), and Asia (-3.4% YoY) fell less than anticipated, they still represent a contraction. Looking ahead, the ICCO forecasts a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with production potentially rising +7.8% YoY, which could temper long-term price strength if realized.

Key Decisions for Investors

• Investors should closely monitor West African weather patterns, Ivory Coast export data, and mid-crop quality reports as these are key drivers of near-term cocoa price volatility.
• Consider the adverse impact of sustained high cocoa prices and potential tariffs on chocolate manufacturers such as Hershey (HSY) and Mondelez (MDLZ), which are experiencing sales pressure and margin concerns.
• Acknowledge the current supply-driven price strength against the backdrop of potential demand destruction and the ICCO's forecast for a market surplus in 2024/25, suggesting a cautious approach to long-term bullish positions.
• Evaluate positions in cocoa futures (CCN25, CAN25) by weighing the immediate supply constraints against the growing evidence of consumer pullback and the significant rebound in U.S. port inventories.