Cocoa Prices Retreat as Global Demand Weakens

Cocoa prices recently fell to multi-month lows, primarily driven by signs of weak global demand, with Q3 grindings down significantly in Asia (-17%) and Europe (-4.8%), and North American chocolate sales volume declining over 21%. This demand weakness coincides with an outlook for abundant supplies, as Ivory Coast and Ghana increase farmer payments and the Ivory Coast anticipates an improved crop, leading to surging deliveries. Despite a record 2023/24 global deficit, the International Cocoa Organization (ICCO) forecasts a 142,000 MT surplus for 2024/25, marking the first in four years, reinforcing the bearish sentiment alongside a large net-short position by commodity funds.

Analysis

Cocoa prices closed sharply lower, with NY cocoa reaching a 20-month low and London cocoa a 20.5-month low, primarily due to weak global demand signals. Q3 cocoa grindings fell significantly year-over-year in Asia (-17% to 183,413 MT, a 9-year low) and Europe (-4.8% to 337,353 MT, a 10-year low). North American chocolate sales volume also declined over 21% in the 13 weeks ending September 7, indicating broad consumer demand contraction.
This demand weakness is compounded by an outlook for abundant supplies, as Ivory Coast and Ghana increased farmer payments, and the Ivory Coast anticipates an improved main crop. Mondelez reported West African cocoa pod counts are 7% above the five-year average, suggesting higher yields. The ICCO, despite a record 2023/24 deficit, forecasts a 142,000 MT surplus for 2024/25, projecting a 7.8% y/y production increase.
Commodity funds have significantly boosted net-short positions in London cocoa by 2,286 to 13,057, the largest in over three years, indicating strong bearish sentiment. While some supportive factors exist, such as slower Ivory Coast exports and Nigeria's projected production decline (-11% y/y for 2025/26), these are largely overshadowed by the overarching supply increase and demand concerns.

Key Decisions for Investors

• Investors should closely monitor global cocoa grindings data, particularly from Asia and Europe, as these provide critical indicators of fundamental demand trends.
• Given the ICCO's forecast for a 2024/25 surplus and the outlook for increased supplies, consider potential for further price downside or evaluate existing short positions.
• Evaluate the impact of commodity fund positioning, as their record net-short stance could exacerbate price movements, both downwards and in any potential short-covering rally.
• For chocolate manufacturers like Mondelez (MDLZ), the outlook for lower cocoa prices could improve margins, warranting a closer look at their cost structures and forward guidance.