Cocoa Futures Climb on Short Covering as the Dollar Weakens

Cocoa prices rose Wednesday, supported by dollar weakness and concerns over tightening supplies from the Ivory Coast, where exports are slowing and the mid-crop harvest faces quality issues with reported rejections from processors. The ICCO recently revised its 2023/24 global cocoa deficit to -494,000 MT, the largest in over 60 years, while also forecasting a surplus for 2024/25; however, demand concerns persist amid reports from Barry Callebaut, Hershey, and Mondelez about weakening sales and the potential impact of tariffs on consumer demand.

Analysis

Cocoa prices experienced an uptick, with July ICE NY cocoa closing +1.77% and July ICE London cocoa up +1.13%, partly attributed to US dollar weakness prompting short covering. Gains in London were tempered by a strengthening British pound, which rose to a 1-week high. Fundamentally, cocoa markets are navigating a complex environment. Supply tightness is a significant concern, evidenced by the slowing pace of Ivory Coast cocoa exports, which, while up +6.7% year-to-date to 1.6 MMT, represent a deceleration from the +35% increase seen in December. Weather remains a critical factor, with drought persisting across more than a third of Ghana and Ivory Coast despite recent rains. Quality issues plague the Ivory Coast's mid-crop, currently being harvested, with processors reportedly rejecting beans due to 5-6% poor quality per truckload, compared to 1% in the main crop; this mid-crop is estimated at 400,000 MT, down -9% from last year. Further supporting prices, Ghana's Cocobod reduced its 2024/25 harvest forecast to 617,500 MT. The International Cocoa Organization (ICCO) amplified 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% YoY and the global stocks/grindings ratio at a 46-year low of 27.0%. Conversely, ICE-monitored cocoa inventories in US ports have rebounded to an 8.5-month high of 2,227,780 bags, providing some bearish pressure. Demand destruction is a growing apprehension, as major chocolate manufacturers like Barry Callebaut, Hershey, and Mondelez International report negative impacts from high cocoa prices and potential tariffs. Hershey's Q1 sales fell -14%, and Mondelez noted consumers cutting back. However, Q1 global cocoa grindings, though lower year-over-year (North America -2.5%, Europe -3.7%, Asia -3.4%), were less severe than anticipated. Looking ahead, the ICCO projects a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with global production expected to rise +7.8% YoY to 4.84 MMT, potentially alleviating current tightness.

Key Decisions for Investors

• Investors should weigh the current significant supply deficit and ongoing production challenges in West Africa, which support prices, against mounting evidence of demand destruction from major confectioners and a forecasted global surplus for the 2024/25 season.
• Monitor key leading indicators such as West African weather patterns, Ivory Coast mid-crop quality reports, export data, and global cocoa grinding figures to gauge the evolving supply-demand balance.
• Consider the potential for continued price volatility due to these conflicting fundamental signals and the influence of currency fluctuations, particularly the US dollar and British pound, on cocoa futures.
• Evaluate positions in cocoa-related equities like Hershey (HSY) and Mondelez (MDLZ) in light of their reported sales declines and cautious outlooks stemming from high input costs and weakening consumer demand.