Rising ICE Cocoa Inventories Undercut Cocoa Prices

Cocoa futures declined Tuesday, reversing earlier gains, after ICE-monitored cocoa inventories in U.S. ports rose to a 7 3/4-month high. Concerns over weakening consumer demand due to high prices and potential tariffs are also weighing on cocoa, as evidenced by Barry Callebaut's reduced sales guidance and Hershey's Q1 sales decline of 14%. Despite these bearish factors, cocoa prices remain supported by concerns about the quality of the Ivory Coast mid-crop and reduced production forecasts from Ghana, contributing to a projected global cocoa deficit.

Analysis

Cocoa prices experienced a downturn, with July ICE NY cocoa (CCN25) closing down -0.91% and July ICE London cocoa #7 (CAN25) down -0.16%, reversing an earlier advance that saw NY cocoa reach a 3-1/2 month nearest-futures high. This price retreat was primarily attributed to an increase in ICE-monitored cocoa inventories held in US ports, which climbed to a 7-3/4 month high of 2,156,644 bags, sparking long liquidation. Adding to bearish pressures are concerns over weakening consumer demand driven by high cocoa prices and potential tariffs. This is underscored by Barry Callebaut AG's downward revision of its annual sales guidance, Hershey Co.'s reported 14% Q1 sales decline and an expected $15-$20 million in Q2 tariff costs, and Mondelez International's weaker-than-expected Q1 sales due to consumer reticence.

Despite these bearish developments, several fundamental factors provide underlying support for cocoa prices. Ivory Coast cocoa exports, though up +10.5% year-to-date (Oct 1-May 18), have seen a deceleration in growth compared to the +35% increase observed in December. Persistent drought conditions affecting over a third of Ghana and Ivory Coast, according to the African Flood and Drought Monitor, continue to raise supply concerns. Furthermore, significant quality issues are impacting the Ivory Coast's mid-crop, with processors reporting 5-6% poor quality beans per truckload, a substantial increase from the 1% typical of the main crop; Rabobank links this to late rainfall. The Ivory Coast's mid-crop is estimated at 400,000 MT, a -9% decrease from last year. Ghana, the world's second-largest producer, also faces reduced output, with Cocobod cutting its 2024/25 cocoa harvest forecast to 617,500 MT, down -5% from an earlier estimate. Global demand, as indicated by Q1 cocoa grindings, showed resilience, with North American grindings falling -2.5% y/y (better than the -5% expected), European grindings down -3.7% y/y (versus -5% expected), and Asian grindings declining -3.4% y/y (against expectations of at least -5%).

The International Cocoa Organization (ICCO) highlighted a 2023/24 global cocoa deficit of -441,000 MT, the largest in over 60 years, with production down -13.1% y/y and the global stocks/grindings ratio at a 46-year low of 27.0%. This severe deficit has fueled a sharp rally in cocoa prices over the past two weeks. However, for the 2024/25 season, the ICCO projects a global cocoa surplus of 142,000 MT, the first in four years, with global production anticipated to rise by +7.8% y/y to 4.84 MMT, suggesting a potential shift in market balance.

Key Decisions for Investors

• Investors should brace for continued volatility in cocoa futures, navigating the current tension between rising U.S. inventories and demand headwinds versus significant West African supply disruptions and a historically large 2023/24 global deficit.
• Closely monitor developments in West African weather, Ivory Coast mid-crop quality assessments, and upcoming financial reports from major chocolate manufacturers for further insights into demand elasticity and short-term price catalysts.
• For long-term positions, carefully evaluate the ICCO's forecast of a return to a global surplus in 2024/25, which may cap sustained price appreciation beyond the current marketing year, against the immediate realities of the severe ongoing deficit.
• Shareholders in companies like Hershey Co. (HSY) and Barry Callebaut AG (BRN) should assess the impact of sustained high cocoa prices and potential tariffs on corporate profitability and sales volumes, considering the recent negative guidance and reported sales declines.