Beneficial Rain in West Africa Pressures Cocoa Prices

Cocoa prices declined to 2-week lows Wednesday, pressured by forecasts of favorable rain in West Africa, expected to benefit crop development, and an 8-month high in ICE-monitored cocoa inventories in U.S. ports. Offsetting these factors are concerns about the quality of the Ivory Coast's mid-crop harvest, rejected truckloads of beans, and slowing Ivory Coast cocoa exports, signaling potentially tighter future supplies; additionally, concerns about waning consumer demand due to high prices and potential tariffs are weighing on the market despite better-than-expected global cocoa demand in Q1.

Analysis

Cocoa prices recently retreated to two-week lows, primarily influenced by forecasts for beneficial rainfall in West Africa, which could improve crop development, and a significant rebound in ICE-monitored cocoa inventories in U.S. ports to an 8-month high of 2,187,668 bags. However, these bearish factors are counterbalanced by persistent supply-side concerns. Ivory Coast cocoa exports, while up +9.6% year-to-date to May 25, show a decelerating growth rate compared to the +35% increase seen in December, signaling potentially tighter future supplies. Furthermore, despite recent rains, over a third of Ghana and Ivory Coast remain affected by drought. Significant quality issues plague the Ivory Coast's mid-crop, with processors rejecting beans due to 5-6% poor quality, compared to 1% in the main crop; this mid-crop is also forecast to be 400,000 MT, down 9% year-over-year. Ghana's 2024/25 cocoa harvest forecast has been revised downward by 5% to 617,500 MT. The International Cocoa Organization (ICCO) reported a substantial 2023/24 global cocoa deficit of -441,000 MT, the largest in over 60 years, with production down 13.1% year-over-year and the stocks-to-grindings ratio at a 46-year low of 27.0%. On the demand side, concerns about waning consumer appetite due to high prices and potential tariffs are evident, with Barry Callebaut cutting sales guidance, Hershey (HSY) reporting a 14% Q1 sales decline and anticipating tariff impacts, and Mondelez (MDLZ) citing weaker Q1 sales due to consumer cutbacks. Conversely, Q1 global cocoa grindings were better than anticipated, with North American grindings down -2.5% (vs. -5% expected), European grindings down -3.7% (vs. -5% expected), and Asian grindings down -3.4% (vs. -5% expected), suggesting some resilience in underlying demand. Looking forward, the ICCO projects a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with global production expected to rise +7.8% year-over-year.

Key Decisions for Investors

• Investors should anticipate continued volatility in cocoa prices due to the conflicting signals from improving short-term weather, rising inventories, versus persistent underlying supply deficits, ongoing drought conditions, and crop quality issues.
• Monitor West African weather developments, Ivory Coast mid-crop quality reports, and actual export volumes closely, as these will be key determinants of near-term price direction, alongside consumer demand responses to sustained high prices and tariffs.
• For equity investors in chocolate manufacturers like Hershey (HSY) and Mondelez (MDLZ), which exhibit negative sentiment, carefully assess their strategies for managing elevated input costs and mitigating potential further declines in sales volume, as Q1 results already indicate significant headwinds.
• Consider the ICCO's forecast for a 2024/25 surplus, which suggests a potential easing of the extreme tightness in the medium term, but acknowledge that the transition from a historic deficit could involve substantial price fluctuations.