Cocoa Prices Surge on Supply Fears

Cocoa prices surged today, reaching multi-week highs, primarily driven by immediate supply concerns stemming from the EU's accelerated deforestation law enforcement, reduced Ivory Coast exports, and historically low global inventories, exacerbated by a significant 2023/24 deficit and large net-short positions by commodity funds. However, these gains are tempered by indicators of weakening global demand, evidenced by declining Q3 grindings in Asia and Europe, and an anticipated improvement in the 2024/25 crop year from West Africa, which is projected to result in a global surplus.

Analysis

Cocoa prices surged today, with NY cocoa up +6.25% and London cocoa up +8.10%, reaching multi-week highs. This sharp increase is primarily driven by heightened supply concerns, notably the EU's proposed six-month delay for enforcing its deforestation laws, which could tighten cocoa imports. The rally is exacerbated by a significant net-short position by commodity funds in London cocoa futures, the largest in over three years, potentially fueling further short-covering.

Further supporting current prices are signs of reduced supply from major producers and historically low inventories. Ivory Coast's cocoa exports for October 1-19 were down -31% year-over-year, while ICE-monitored US port inventories fell to a 6.25-month low. The International Cocoa Organization (ICCO) revised its 2023/24 global deficit to -494,000 MT, the largest in over 60 years, with the stocks-to-grindings ratio declining to a 46-year low.

Despite immediate price strength, significant bearish indicators persist, particularly concerning demand and future supply. Q3 cocoa grindings in Asia and Europe declined -17% and -4.8% year-over-year respectively, reflecting weak global demand, while North American chocolate candy sales fell over -21%. Moreover, an improved cocoa crop outlook for Ivory Coast and surging deliveries in Ghana, coupled with ICCO's forecast for a 2024/25 global surplus of 142,000 MT, suggest potential future price pressure.

Key Decisions for Investors

• Investors should closely monitor the implementation details and potential impact of the EU's deforestation laws on cocoa supply chains, as this presents a significant near-term risk factor for European imports.
• Given the mixed signals of immediate supply tightness and longer-term demand weakness coupled with projected future surpluses, investors should evaluate their positions considering both short-term speculative opportunities from short-covering and the potential for price moderation in 2024/25.
• It is prudent to track upcoming grindings data for further indications of demand elasticity to high prices, alongside ongoing crop reports from West Africa, particularly Ivory Coast and Ghana, to assess the actualization of the forecasted 2024/25 global surplus.