Favorable Weather in West Africa Weighs on Cocoa Prices

Cocoa prices declined sharply today, reversing earlier gains, primarily due to favorable weather forecasts in West Africa, which are expected to benefit cocoa crop development in the Ivory Coast and Ghana. The rebound in ICE-monitored cocoa inventories in U.S. ports to an 8-1/4 month high also weighed on prices. Despite these bearish factors, concerns remain about the quality of the Ivory Coast's mid-crop and the slowing pace of Ivory Coast cocoa exports, which could tighten future supplies; additionally, concerns about waning consumer demand due to high prices and potential tariffs are also weighing on prices.

Analysis

Cocoa futures experienced a significant downturn, with July ICE NY cocoa (CCN25) falling -3.78% and July ICE London cocoa #7 (CAN25) declining -3.33%, primarily attributed to forecasts of favorable rainfall in West Africa, which is anticipated to benefit crop development in key growing regions like Ivory Coast and Ghana. This bearish sentiment was compounded by a notable rebound in ICE-monitored cocoa inventories held in U.S. ports, which climbed to an 8-1/4 month high of 2,201,950 bags. However, several factors provide underlying support for cocoa prices. The pace of Ivory Coast cocoa exports, while up +6.7% year-over-year for the current marketing season (1.6 MMT), has slowed considerably from the +35% increase observed in December, signaling potentially tighter future supplies. Persistent drought conditions still affect over a third of Ghana and the Ivory Coast, despite recent rains. Furthermore, quality concerns plague the Ivory Coast's mid-crop, with processors reporting 5-6% poor quality beans, substantially higher than the 1% typical for the main crop; this year's mid-crop is estimated at 400,000 MT, a -9% decrease from last year. Adding to supply tightness, Ghana's 2024/25 cocoa harvest forecast was revised down by Cocobod to 617,500 MT. The International Cocoa Organization (ICCO) amplified these supply concerns by revising its 2023/24 global cocoa deficit to -494,000 MT, the largest in over 60 years, with 2023/24 production down -13.1% y/y and the global stocks/grindings ratio at a 46-year low of 27.0%. Conversely, demand-side pressures are evident. Chocolate makers like Barry Callebaut AG, Hershey Co. (HSY), and Mondelez International (MDLZ) have reported challenges: Barry Callebaut cut sales guidance, Hershey's Q1 sales fell -14% with anticipated tariff costs, and Mondelez saw weaker Q1 sales due to consumer cutbacks amidst high prices and economic uncertainty. While Q1 cocoa grindings in North America (-2.5% y/y), Europe (-3.7% y/y), and Asia (-3.4% y/y) declined, these figures were better than the steeper falls anticipated by the market. Looking forward, the ICCO projects a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with global production expected to rise +7.8% y/y, presenting a mixed long-term outlook against current deficits.

Key Decisions for Investors

• Investors should closely monitor West African weather patterns and crop quality reports, as these remain critical short-term price drivers, capable of outweighing the current bearish inventory data.
• Given reported sales declines and tariff impacts at major chocolate manufacturers like Hershey (HSY) and Mondelez (MDLZ), consider reviewing exposure to these names, as sustained high cocoa prices and waning consumer demand could further pressure their performance.
• Acknowledge the conflicting signals: a significant current global deficit and historically low stocks-to-grindings ratio provide price support, while the ICCO's forecast of a 2024/25 surplus and immediate weather relief suggest potential for price easing; positions should reflect tolerance for this volatility.
• Evaluate the sustainability of current cocoa prices in light of potential demand destruction, as evidenced by reduced grindings (albeit better than feared) and negative commentary from large confectioners regarding consumer behavior.