Cocoa Prices Supported by Weather Risks in West Africa

Cocoa prices are advancing for a second day, primarily driven by immediate supply concerns stemming from adverse West African weather, including heavy rains in Ivory Coast and dryness in Ghana/Nigeria, which is impacting crop movement and quality, alongside tightening U.S. inventories. This short-term bullish sentiment is counterbalanced by significant demand destruction, as evidenced by major chocolate makers like Lindt and Barry Callebaut lowering guidance due to persistently high prices, and sharp declines in Q2 global grindings. While the International Cocoa Organization (ICCO) recently revised the 2023/24 global deficit to a 60-year high, it also forecasts the first surplus in four years for 2024/25, highlighting a market grappling with current tightness against expectations of future supply recovery and ongoing demand weakness.

Analysis

Cocoa futures are exhibiting significant volatility, caught between immediate, severe supply-side constraints and forward-looking bearish demand and supply indicators. The current price strength is underpinned by adverse weather in West Africa, with heavy rains in the Ivory Coast impeding transport and dry conditions in Ghana and Nigeria damaging crops. This is exacerbated by tightening physical inventories, evidenced by ICE-monitored stocks in US ports falling to a four-month low. The market is still processing the International Cocoa Organization's (ICCO) revised 2023/24 global deficit of -494,000 MT, the largest in over 60 years, which has driven the stocks-to-grindings ratio to a 46-year low of 27.0%. However, this bullish narrative is strongly countered by clear evidence of demand destruction. Major confectioners like Lindt & Sprüngli and Barry Callebaut have issued negative guidance, with the latter reporting a -9.5% sales volume drop in the March-May period, its largest quarterly decline in a decade. This is corroborated by weak Q2 global grindings data, which fell -7.2% y/y in Europe and -16.3% y/y in Asia. Furthermore, the market is pricing in a future supply recovery, supported by a Mondelez report that West African pod counts are 7% above the five-year average and the ICCO's forecast for a 142,000 MT global surplus in 2024/25, which would be the first in four years.

Key Decisions for Investors

• Investors should prepare for sustained volatility as the market pivots between short-term bullish supply news from West Africa and bearish long-term demand destruction signals from chocolate producers and global grindings data.
• It is critical to monitor near-term catalysts such as Ivory Coast shipment figures and weather reports, while treating quarterly grindings data and chocolate company earnings as key barometers for the extent of demand erosion.
• Consider positioning for a potential flattening of the forward curve, as the market's current structure reflects a historic 2023/24 deficit, which contrasts sharply with the ICCO's forecast for a production surplus in the 2024/25 season.