Cocoa Prices Hammered by Favorable Growing Conditions in West Africa

Cocoa prices are sharply lower today, with London cocoa falling to a 2-1/2 week low, driven by forecasts of beneficial rainfall in West Africa and a rebound in ICE-monitored cocoa inventories to a 9-month high. Despite this, slowing cocoa exports from the Ivory Coast and concerns about the quality of the Ivory Coast mid-crop are providing price support. Concerns about consumer demand for cocoa and cocoa products, exacerbated by potential tariffs, also weigh on the market, as major chocolate makers report weaker sales and anticipate higher costs.

Analysis

Cocoa prices are experiencing significant downward pressure, with July ICE NY cocoa (CCN25) falling -2.68% and July ICE London cocoa #7 (CAN25) declining -3.14% to a 2-1/2 week low. This movement is primarily attributed to forecasts of beneficial rainfall in West Africa, expected to improve crop conditions, and a substantial rebound in ICE-monitored cocoa inventories held in US ports, which climbed to a 9-month high of 2,310,539 bags after hitting a 21-year low earlier in the year. Compounding the bearish sentiment are widespread concerns over weakening consumer demand for cocoa products due to high prices and potential tariffs. Major chocolate manufacturers reflect this trend: Barry Callebaut AG reduced its annual sales guidance, Hershey Co. (HSY) reported a 14% Q1 sales decrease and anticipates $15-$20 million in Q2 tariff-related costs, and Mondelez International (MDLZ) posted weaker-than-expected Q1 sales as consumers curtail snack purchases. This demand slowdown is further evidenced by global declines in Q1 cocoa grindings: North America (-2.5% y/y), Europe (-3.7% y/y), and Asia (-3.4% y/y). However, several factors provide underlying support for cocoa prices. The rate of cocoa exports from the Ivory Coast has decelerated; while shipments are up +6.4% year-to-date, this is a significant slowdown from the +35% increase observed in December. Additionally, Nigerian April cocoa exports fell -11% y/y. Persistent drought conditions still affect over a third of Ghana and the Ivory Coast despite recent rains. Quality concerns also loom over the Ivory Coast's mid-crop, estimated at 400,000 MT (down -9% y/y), with processors rejecting beans due to poor quality (5-6% affected versus 1% in the main crop). The International Cocoa Organization (ICCO) has revised its 2023/24 global cocoa deficit to -494,000 MT, the largest in over 60 years, with production falling -13.1% y/y and the stocks-to-grindings ratio at a 46-year low of 27.0%. Looking forward, the ICCO anticipates a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with global production projected to rise +7.8% y/y.

Key Decisions for Investors

• Investors should acknowledge the current bearish momentum driven by favorable West African weather forecasts and rising inventories, but remain cognizant of the significant 2023/24 supply deficit and mid-crop quality issues which could provide price support or trigger volatility.
• Closely monitor consumer demand indicators, particularly sales performance and outlooks from major chocolate companies like Hershey (HSY) and Mondelez (MDLZ), as price elasticity and tariff impacts are critical variables affecting cocoa consumption.
• Anticipate continued price volatility due to conflicting signals: a severe current global deficit versus a projected 2024/25 surplus, and short-term rainfall benefits versus underlying long-term drought conditions in key growing regions, necessitating careful risk management.
• Evaluate the ICCO's forecast for a 2024/25 surplus and +7.8% production increase against ongoing weather patterns and crop development reports to gauge the sustainability of any price recovery or further declines.