Cocoa Prices Plunge as Prospects Improve for West African Cocoa Crops

Cocoa prices plummeted on Friday, with ICE NY cocoa closing down 5.00% and ICE London cocoa down 6.41%, driven by forecasts of favorable rain in West Africa and a rebound in ICE-monitored cocoa inventories to an 8-month high. Losses in London were exacerbated by a surge in the British pound, while concerns persist regarding the quality of the Ivory Coast mid-crop and the potential impact of tariffs on consumer demand, despite better-than-expected global cocoa grindings data.

Analysis

Cocoa prices experienced a significant downturn, with July ICE NY cocoa (CCN25) falling -5.00% and July ICE London cocoa (CAN25) declining -6.41% to 1.5-week lows, primarily driven by forecasts of beneficial rainfall in West Africa expected to support crop development, as meteorologist Vaisala anticipates continued moderate showers. This bearish sentiment was amplified by a rebound in ICE-monitored U.S. port inventories to an 8-month high of 2,177,8904 bags, up from a 21-year low, and a surge in the British pound (^GBPUSD) to a 3.25-year high, which pressured sterling-denominated London futures. Despite these immediate pressures, underlying bullish factors persist from the current 2023/24 season, including a slowdown in the growth rate of Ivory Coast cocoa exports (up +10.5% year-to-date through May 18 compared to a much larger +35% increase seen in December), ongoing drought conditions affecting over a third of Ghana and Ivory Coast, and significant quality concerns regarding the Ivory Coast mid-crop, with processors rejecting beans due to 5-6% poor quality compared to 1% in the main crop. This mid-crop is anticipated to be 400,000 MT, down -9% year-over-year. Consumer demand also presents a mixed picture; while Q1 global cocoa grindings in North America (-2.5% y/y), Europe (-3.7% y/y), and Asia (-3.4% y/y) were better than feared, major chocolate manufacturers like Barry Callebaut AG (BYCBF) which cut sales guidance, The Hershey Company (HSY) whose Q1 sales fell 14% with anticipated tariff costs, and Mondelez International (MDLZ) which reported weaker Q1 sales, have highlighted waning consumer appetite due to high prices and tariff uncertainties. The International Cocoa Organization (ICCO) confirmed a substantial 2023/24 global cocoa deficit of -441,000 MT, the largest in over 60 years, with production down -13.1% y/y and a 46-year low stocks/grindings ratio of 27.0%. However, looking forward, the ICCO projects a shift to a 142,000 MT global surplus for 2024/25, the first in four years, with global production forecast to rise +7.8% y/y to 4.84 MMT.

Key Decisions for Investors

• Investors should anticipate continued significant volatility in cocoa markets as immediate bearish factors such as West African rain forecasts and rising inventories clash with persistent 2023/24 supply tightness, crop quality issues, and the ICCO's projection of a market surplus in 2024/25.
• Closely monitor West African weather developments, Ivory Coast mid-crop quality and harvest data, and inventory levels, as these will be critical short-term price drivers and indicators of the potential transition to a more balanced market.
• Scrutinize upcoming earnings reports and demand outlooks from chocolate manufacturers like HSY, MDLZ, and BYCBF, paying particular attention to commentary on consumer price elasticity and the impact of tariffs, which could significantly influence demand recovery and price ceilings.