Cocoa Prices Retreat on Beneficial Crop Weather in West Africa

Cocoa prices declined sharply Monday due to favorable weather forecasts in West Africa, potentially aiding crop development, and an increase in ICE-monitored cocoa inventories to an 8-1/2 month high. Despite supportive factors such as slowing Ivory Coast exports, concerns over Ivory Coast mid-crop quality (with 5-6% of beans being poor quality compared to 1% during the main crop), and a revised global cocoa deficit of -494,000 MT, demand-side worries stemming from high cocoa prices and potential tariffs, as highlighted by reduced sales guidance from Barry Callebaut and weaker sales reported by Hershey and Mondelez, are weighing on the market.

Analysis

Cocoa prices experienced a notable downturn, with July ICE NY cocoa (CCN25) closing down -3.24% and July ICE London cocoa #7 (CAN25) down -3.33%, largely driven by forecasts of favorable rainfall in West Africa, which is anticipated to support crop development. This bearish sentiment was amplified by a significant increase in ICE-monitored cocoa inventories in US ports, reaching an 8-1/2 month high of 2,202,098 bags, up from a 21-year low earlier in the year. Despite these immediate pressures, several underlying factors support prices: the pace of Ivory Coast cocoa exports, though up +6.7% year-to-date to 1.6 MMT, has decelerated from the +35% increase seen in December, indicating potential future supply tightness. Persistent drought conditions still cover over a third of Ghana and the Ivory Coast. Furthermore, quality concerns plague the Ivory Coast's mid-crop, with processors reporting 5-6% poor quality beans, compared to 1% during the main crop; this mid-crop is estimated at 400,000 MT, down -9% from last year. Ghana's 2024/25 cocoa harvest forecast has also been reduced by Cocobod to 617,500 MT. The International Cocoa Organization (ICCO) has revised its 2023/24 global cocoa deficit estimate to -494,000 MT, the largest in over 60 years, with 2023/24 production falling -13.1% y/y and the global stocks/grindings ratio hitting a 46-year low at 27.0%. On the demand side, concerns are mounting over waning consumer appetite due to high prices and potential tariffs. Barry Callebaut AG cut its annual sales guidance, Hershey Co. reported a 14% Q1 sales decline and anticipates $15-$20 million in Q2 tariff costs, and Mondelez International observed weaker Q1 sales as consumers reduce snack purchases. While Q1 global cocoa grindings in North America (-2.5% y/y), Europe (-3.7% y/y), and Asia (-3.4% y/y) declined less than expected, the overarching fear of demand destruction persists. Looking forward, the ICCO forecasts a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with production projected to increase by +7.8% y/y.

Key Decisions for Investors

• Investors should closely monitor West African weather patterns and evolving ICE inventory levels, as these are significant short-term drivers of cocoa price volatility.
• Consider the dichotomy between current bearish price movements due to weather and inventories, versus strong underlying supply constraints such as the severe 2023/24 global deficit, reduced crop forecasts, and Ivory Coast mid-crop quality issues, which could provide price support.
• Evaluate the negative sentiment surrounding chocolate manufacturers like Hershey (HSY) and Mondelez (MDLZ), who face declining sales and margin pressures from high cocoa costs and potential tariffs, indicating weakening consumer demand for chocolate products.
• Factor in the ICCO's projection of a return to a global cocoa surplus in 2024/25, which, if production targets are met, could cap significant long-term price appreciation and signal a potential shift in market balance.