Dollar Weakness Helps Cocoa Prices Recover

Cocoa prices settled mixed, with London cocoa hitting a 4-week low while New York rebounded from a 5-week low amid short-covering and declining US inventories. Despite immediate bullish factors like the International Cocoa Organization's revised 2023/24 global deficit of 494,000 MT—the largest in over 60 years—and quality concerns over Ivory Coast's mid-crop, the market faces significant bearish pressure. This pressure stems from weakening global chocolate demand, evidenced by major Q2 grindings declines in Europe (-7.2%) and Asia (-16.3%), coupled with projections for a 2024/25 global surplus and increased output from Ghana.

Analysis

The cocoa market is exhibiting significant tension between a historically tight current supply situation and emerging headwinds from demand destruction and a projected supply recovery. While New York futures rebounded on short-covering driven by a weaker dollar, the fundamental backdrop is defined by the International Cocoa Organization's (ICCO) revised 2023/24 global deficit of 494,000 MT, the largest in over 60 years, which has pushed the stocks-to-grindings ratio to a 46-year low. This tightness is exacerbated by near-term supply issues, including the driest weather in 46 years for Ivory Coast impacting the main crop, a projected 9% year-over-year decline in the country's mid-crop, and significant quality concerns leading to processors rejecting shipments. However, powerful bearish factors are developing. On the demand side, high prices are eroding consumption, evidenced by sharp Q2 grindings declines in Europe (-7.2%) and Asia (-16.3%), and major chocolate makers like Barry Callebaut and Lindt lowering sales guidance due to plummeting volumes. Looking ahead, the supply picture is forecast to improve, with the ICCO projecting a 142,000 MT global surplus for 2024/25, Ghana anticipating an 8.3% production increase, and beneficial rains expected in Ivory Coast.

Key Decisions for Investors

• Investors should recognize the market's high volatility, which stems from the conflict between the severe 2023/24 supply deficit and the forward-looking bearish case of demand destruction and a 2024/25 supply surplus.
• Closely monitor upcoming Q3 global grindings data and confectioner earnings for further evidence of demand destruction, as this will be a key determinant of whether prices can sustain their elevated levels.
• Track West African weather reports and early main-crop harvest indicators (starting October) to validate the ICCO's forecast for a supply recovery, as any disruption could quickly reverse the bearish medium-term outlook.
• Given the significant drop in chocolate sales and the forecast for a return to a supply surplus, consider that the long-term price trend may be turning bearish, but remain prepared for sharp, short-term rallies driven by any negative developments in the West African crop.