Cocoa Prices Fall Back from 3-week Highs

Cocoa prices are currently experiencing pre-weekend liquidation, yet the market faces conflicting fundamental drivers. Significant supply concerns, including tighter EU deforestation regulations, low US inventories, and a record 2023/24 global deficit revised to -494,000 MT by ICCO, provide bullish support. However, weak global demand, evidenced by sharp declines in Q3 Asian and European cocoa grindings and reduced North American chocolate sales, combined with an improved 2024/25 crop outlook in West Africa and ICCO's forecast for a 142,000 MT surplus next year, are exerting downward pressure, creating a volatile environment further influenced by a large net-short position held by commodity funds.

Analysis

Cocoa prices are experiencing pre-weekend long liquidation, with NY and London futures down today, despite NY cocoa reaching an early 3-week high. The market is characterized by a significant divergence between immediate supply concerns and weakening demand signals, contributing to a mixed sentiment environment and moderate market impact.

Supply-side factors remain supportive, driven by the EU's proposed six-month delay for deforestation law enforcement, which could tighten cocoa imports due to traceability requirements. US ICE-monitored inventories have fallen to a 6.5-month low of 1,854,690 bags. Furthermore, the ICCO revised the 2023/24 global deficit to a 60-year high of -494,000 MT, with the stocks-to-grindings ratio at a 46-year low of 27.0%.

Conversely, weak global demand is a significant bearish factor, with Q3 Asia and European cocoa grindings falling -17% and -4.8% year-over-year, respectively, reaching multi-year lows. North American chocolate sales volume also declined over 21% in the 13 weeks ending September 7. Looking ahead, the ICCO projects a 2024/25 global surplus of 142,000 MT, marking the first surplus in four years, driven by an anticipated 7.8% increase in production and improved West African crop outlooks.

Investor positioning shows commodity funds holding their largest net-short position in London cocoa in over three years, totaling 13,057 contracts. This extreme positioning introduces a risk of a significant short-covering rally, which could temporarily override fundamental demand weakness or future supply expectations, especially given the current supply tightness.

Key Decisions for Investors

• Monitor the impact of EU deforestation regulations on cocoa supply chains and import flows, as this could create sustained price volatility.
• Evaluate the potential for a short-covering rally given the record net-short positioning by commodity funds in London cocoa futures, which could provide tactical long opportunities.
• Assess the balance between current supply tightness, evidenced by low US inventories and the 2023/24 deficit, and the projected 2024/25 global surplus, adjusting positions based on evolving crop reports and demand indicators.
• Pay close attention to regional grinding data and chocolate sales volumes for signs of demand recovery or further deterioration, particularly in Asia and Europe.