Favorable Growing Conditions in West Africa Hammers Cocoa Prices

Cocoa prices declined sharply Wednesday, extending Tuesday's losses, with London cocoa hitting a 2-1/2 week low due to forecasts of beneficial rainfall in West Africa and a rebound in ICE-monitored cocoa inventories in U.S. ports to a 9-1/4 month high. Despite these bearish factors, slowing cocoa exports from the Ivory Coast and concerns about the quality of the Ivory Coast mid-crop provide some price support, while broader concerns about consumer demand and potential tariffs impacting chocolate prices remain a headwind, as evidenced by reduced sales guidance from Barry Callebaut and weaker sales reported by Hershey and Mondelez.

Analysis

Cocoa prices experienced a significant downturn, with July ICE NY cocoa closing down -2.65% and July ICE London cocoa down -3.14% to a 2-1/2 week low, primarily driven by forecasts of beneficial rainfall in West Africa and a notable rebound in cocoa inventories. Specifically, ICE-monitored cocoa inventories in US ports reached a 9-1/4 month high of 2,363,861 bags, recovering from a 21-year low. Despite these bearish developments, several factors provide underlying support for prices. Ivory Coast cocoa shipments, while up +6.4% year-to-date, have slowed from a +35% increase seen in December, and Nigerian April cocoa exports declined -11% y/y. Quality concerns plaguing the Ivory Coast's mid-crop, with processors reporting 5-6% poor quality beans and an estimated -9% y/y decline in mid-crop volume to 400,000 MT, also contribute to supply tightness. Furthermore, drought conditions persist in over a third of Ghana and Ivory Coast. However, demand-side pressures are evident; Barry Callebaut reduced its sales guidance, Hershey (HSY) reported a 14% Q1 sales drop and anticipates tariff impacts, and Mondelez (MDLZ) cited consumer cutbacks amid high chocolate prices. This weakening demand is corroborated by Q1 cocoa grindings, which fell -2.5% y/y in North America, -3.7% y/y in Europe, and -3.4% y/y in Asia. The International Cocoa Organization (ICCO) revised its 2023/24 global cocoa deficit upwards to -494,000 MT, the largest in over 60 years, with production down -13.1% y/y and the stocks/grindings ratio at a 46-year low of 27.0%. Conversely, ICCO forecasts a 142,000 MT surplus for 2024/25, with production projected to rise +7.8% y/y.

Key Decisions for Investors

• Given the conflicting signals of immediate bearish weather and inventory news versus underlying supply tightness and significant demand destruction concerns, investors should exercise caution and closely monitor West African weather patterns and crop development reports.
• The slowing export pace from Ivory Coast and quality issues with its mid-crop, alongside the ICCO's record deficit for 2023/24, suggest potential for price volatility; however, the projected 2024/25 surplus could cap long-term upside if production recovers as forecasted.
• Investors should track consumer demand indicators and chocolate manufacturers' earnings, such as those from HSY and MDLZ, as sustained high prices and potential tariffs appear to be negatively impacting consumption, which could further weigh on cocoa prices despite current supply deficits.