Cocoa Prices Slide on Expectations for Ample Global Supplies

Cocoa prices closed mixed, with NY cocoa hitting a 20-month low due to expectations of increased West African supply from higher farmer pay and improved crop outlooks, alongside evidence of demand destruction from major chocolate manufacturers. However, London cocoa gained on a weaker pound, while underlying market dynamics include a record 2023/24 deficit, tight inventories, and significant fund net-short positioning, creating potential for volatility despite a projected 2024/25 global surplus.

Analysis

Cocoa prices closed mixed, with December NY cocoa reaching a 20-month nearest-futures low, while London cocoa gained 0.45% due to British pound weakness. This divergence reflects immediate bearish pressures from anticipated increased supply, as Ivory Coast and Ghana recently raised farmer pay, expected to boost sales and cocoa deliveries, evidenced by Ghana's surge to 50,440 MT in the four weeks ending September 4. The outlook for an improved Ivory Coast main crop, with pod counts 7% above the five-year average, also contributes to supply expectations.

Further bearish sentiment stems from significant demand destruction, with Lindt & Sprüngli lowering margin guidance and Barry Callebaut reducing sales volume guidance twice, reporting a -9.5% drop in March-May sales. Global grindings data reinforces this, with Q2 European grindings down -7.2% and Asian grindings down -16.3% year-over-year, indicating a broader weakness in global cocoa demand.

However, underlying market dynamics present supportive factors. ICE-monitored US cocoa inventories fell to a 5.5-month low, and Ivory Coast exports, while up 3.4% year-over-year, show a sharp deceleration from earlier increases. Quality concerns for the Ivory Coast's mid-crop and projected -11% year-over-year decline in Nigeria's 2025/26 production also tighten supply.

Critically, the ICCO revised its 2023/24 global deficit to -494,000 MT, the largest in over 60 years, with the stocks-to-grindings ratio at a 46-year low of 27.0%. Despite ICCO forecasting a 142,000 MT surplus for 2024/25, significant fund net-short positioning in London cocoa, reaching a three-year high, introduces potential for a short-covering rally, creating a complex and volatile market environment.

Key Decisions for Investors

• Investors should closely monitor actual cocoa arrivals from West Africa and chocolate manufacturers' sales volumes for confirmation of supply increases and demand destruction.
• Consider the potential for significant volatility driven by a short-covering rally, given the record net-short positioning by funds in London cocoa.
• Factor in currency movements, especially the British pound, as they directly influence local cocoa prices and can create regional price divergences.
• Evaluate the long-term implications of the ICCO's projected 2024/25 surplus against the backdrop of the severe 2023/24 deficit and current tight inventory levels.