Cocoa Prices Trade Sideways as They Consolidate Recent Losses

Cocoa prices closed higher but remain near multi-month lows, driven by conflicting supply and demand signals. While weak global demand, evidenced by significant Q3 grinding declines in Asia and Europe, and expectations of abundant West African crops pressure prices, the International Cocoa Organization (ICCO) reported a record 2023/24 global deficit of 494,000 MT. However, ICCO forecasts a 2024/25 surplus, creating a mixed outlook, though tighter U.S. inventories, slower Ivory Coast exports, and a large net-short position by commodity funds could support short-covering rallies.

Analysis

Cocoa prices closed higher on Tuesday but remain near significant multi-month lows, specifically a 20-month nearest-futures low for NY cocoa and a 20.5-month low for London cocoa. This weakness is primarily driven by signs of weak global demand, with Q3 Asia cocoa grindings falling -17% year-over-year to a 9-year low and European grindings down -4.8% year-over-year to a 10-year low. Furthermore, North American chocolate candy sales volumes declined over -21% in the 13 weeks ending September 7, indicating broader consumer demand contraction.

Despite demand concerns, the International Cocoa Organization (ICCO) revised its 2023/24 global deficit to a record -494,000 MT, the largest in over 60 years, with the stocks-to-grindings ratio at a 46-year low of 27.0%. This fundamental tightness is supported by a -31% year-over-year slowdown in Ivory Coast exports and ICE-monitored US inventories reaching a 6.25-month low. However, ICCO also forecasts a 2024/25 global surplus of 142,000 MT, projecting a +7.8% increase in production, which introduces significant forward uncertainty.

Investor positioning shows commodity funds holding their largest net-short position in London cocoa in over three years, totaling 13,057 contracts as of October 14. This extreme positioning presents a potential catalyst for a short-covering rally, despite the prevailing bearish sentiment from expected abundant West African crops and increased farmer payments in Ivory Coast and Ghana. The market is navigating a complex interplay of current supply tightness, weak demand, and a projected future surplus.

Key Decisions for Investors

• Investors should closely monitor upcoming global cocoa grinding and chocolate sales data for signs of demand recovery or further contraction, given the significant Q3 declines.
• The historically large net-short position in London cocoa futures by commodity funds presents a technical catalyst for a potential short-covering rally, warranting consideration for short-term trading strategies.
• Evaluate the discrepancy between the current record ICCO deficit for 2023/24 and the projected 2024/25 surplus, focusing on actual crop development in West Africa and inventory levels for directional cues.
• Assess the long-term implications of increased farmer payments in Ivory Coast and Ghana, which could boost future supplies and potentially mitigate price volatility from current deficits.