Cocoa Prices Retreat as ICE Inventories Climb

Cocoa prices declined Wednesday, pressured by rising ICE-monitored inventories in U.S. ports, which reached a 7-3/4 month high, and a stronger British pound that undercut London cocoa futures. The retreat follows a recent rally driven by concerns over slowing Ivory Coast exports and poor mid-crop quality, with processors rejecting bean shipments due to a 5-6% defect rate compared to 1% in the main crop; demand concerns persist due to high prices and potential tariffs, impacting chocolate manufacturers' sales and outlook.

Analysis

Cocoa prices experienced a notable retreat, with July ICE NY futures declining 1.43% and London futures falling 2.45%, primarily attributed to a significant increase in ICE-monitored US port inventories, which climbed to a 7-3/4 month high of 2,165,175 bags. The strengthening British pound, hitting a 3-1/4 year high, also exerted downward pressure on sterling-denominated London cocoa. This immediate bearish sentiment from rising visible stockpiles tempers persistent underlying supply concerns, including a slowdown in Ivory Coast export growth (from +35% y/y in December to +10.5% by mid-May) and severe quality issues with its mid-crop (5-6% poor quality beans), which is projected to be 9% smaller year-over-year at 400,000 MT. Furthermore, drought conditions persist in West Africa, and Ghana's 2024/25 cocoa harvest forecast has been revised downwards by 5% to 617,500 MT. While the International Cocoa Organization (ICCO) reported a historic global deficit of -441,000 MT for 2023/24 and a 46-year low stocks-to-grindings ratio of 27.0%, demand is showing signs of strain. Major chocolate companies including Hershey (HSY Q1 sales -14%), Barry Callebaut (BRN), and Mondelez (MDLZ) have reported negative impacts from high cocoa prices and tariff uncertainties, leading to reduced sales guidance. Although Q1 global cocoa grindings declined less than feared (e.g., North America -2.5% y/y vs. -5% expected), they still represent a year-over-year contraction. The ICCO's forecast for a 142,000 MT global surplus in 2024/25, the first in four years, driven by an anticipated 7.8% rise in production, provides a counterpoint to the current tight supply narrative.

Key Decisions for Investors

• Monitor the dynamic between rising US port inventories exerting downward pressure and West African supply disruptions, such as crop quality and drought, which could offer future price support.
• Assess the risk of demand destruction evidenced by negative sales reports and guidance from major chocolate manufacturers like Hershey (HSY), Mondelez (MDLZ), and Barry Callebaut (BRN), despite Q1 grindings contracting less than initially anticipated.
• Evaluate the International Cocoa Organization's 2024/25 global surplus forecast and projected production rebound, as this could significantly alter the long-term price outlook from the current deficit-driven market.
• Factor in currency movements, such as the recent strength in the British Pound, for their direct impact on the pricing of London cocoa futures and potential arbitrage opportunities or risks.