Cocoa Prices Finish Higher as a Weak Dollar Spurs Short Covering

Cocoa futures closed higher on Tuesday, fueled by a weaker dollar and significant short covering after prices had extended a two-month decline to hit multi-month lows. Despite a record global deficit in 2023/24, the market faces persistent bearish pressure from expectations of abundant supplies, particularly from improved harvests in Ivory Coast and Ghana, alongside weak global demand reflected in declining grinding figures and chocolate sales. While tighter ICE-monitored inventories and reduced Nigerian output offer some support, the overall outlook remains challenged by anticipated supply increases and a projected global surplus for 2024/25.

Analysis

Cocoa futures experienced a short-term rally on Tuesday, with NY and London contracts closing up +1.32% and +1.23% respectively, primarily driven by a weaker dollar and significant short covering. This rebound followed an extended two-month decline that saw prices hit multi-month lows, indicating a potential technical correction.

Despite this recent uptick, the overarching sentiment remains bearish due to expectations of abundant supplies and persistent weak global demand. Mondelez reported West African cocoa pod counts 7% above the five-year average, signaling an improved crop outlook, while Ghana's cocoa arrivals surged to 50,440 MT in four weeks, significantly higher than the previous year's comparable period.

Global demand indicators are notably weak, with Q2 European cocoa grindings falling -7.2% year-over-year and North American chocolate candy sales down over -21% in the 13 weeks ending September 7. While ICE-monitored US port inventories fell to a 5.75-month low, the International Cocoa Organization (ICCO) forecasts a 142,000 MT global surplus for 2024/25, following a record 2023/24 deficit.

The substantial net-short position by funds, the largest in over three years, could exacerbate any short-covering rallies, offering temporary price support. However, this is counterbalanced by the projected increase in 2024/25 global cocoa production by +7.8% and persistent demand weakness, suggesting a challenging long-term outlook for cocoa prices.

Key Decisions for Investors

• Closely track the actualization of the ICCO's forecasted 2024/25 global cocoa surplus and monitor harvest progress in key producing regions like Ivory Coast and Ghana for confirmation of increased supply.
• Given the significant fund net-short positioning, investors should be prepared for potential short-covering rallies, but recognize these may be technical corrections rather than fundamental shifts.
• Pay close attention to upcoming Q3 global grinding data and retail chocolate sales figures, as sustained weak demand, exemplified by North American sales declines, poses a significant headwind.