Cocoa Prices Retreat on Expectations of US Tariff Cuts

Cocoa prices are extending a week-long decline, with NY cocoa reaching a 1.75-year low, pressured by expectations of a strong West African harvest, potential US tariff reductions, and weak global demand evidenced by disappointing chocolate sales and reduced grindings in Asia and Europe. While the ICCO reported a historic deficit for 2023/24, it now forecasts a 2024/25 surplus, contributing to a mixed supply outlook. However, record short positions by funds, shrinking US inventories, and cocoa's upcoming inclusion in the Bloomberg Commodity Index in January could trigger a significant short-covering rally and passive fund inflows, offering potential price support.

Analysis

Cocoa prices are experiencing a significant downturn, with December NY cocoa falling to a 1.75-year nearest-futures low and London cocoa posting a 3-week low. This decline is primarily driven by expectations of a bumper West African crop, with Mondelez reporting pod counts 7% above the five-year average, and potential US tariff cuts hinted at by Treasury Secretary Bessent. Weak global demand further exacerbates price pressure, evidenced by Hershey's "disappointing" Halloween sales and Q3 grindings declines of -17% y/y in Asia and -4.8% y/y in Europe.

Despite the bearish near-term sentiment, several factors suggest potential price support. The International Cocoa Organization (ICCO) revised its 2023/24 global deficit to a historic -494,000 MT but now projects a 142,000 MT surplus for 2024/25, indicating a shift in the supply-demand balance. Shrinking ICE-monitored US cocoa inventories, which fell to a 7.5-month low of 1,783,757 bags, also provide some underlying support.

Crucially, market positioning indicates a significant short squeeze potential, as funds boosted net-short positions in London cocoa to a 4-year high of 19,194 contracts by November 4. Furthermore, cocoa's upcoming inclusion in the Bloomberg Commodity Index (BCOM) in January, with a 1.7% weighting, is expected to trigger approximately $1.9 billion in passive fund inflows over 80 days. This influx could fuel a substantial short-covering rally, potentially offsetting current fundamental weakness.

Key Decisions for Investors

• Investors should closely monitor the timing and specifics of any announced US tariff reductions, as these could introduce further downside risk to cocoa prices.
• Evaluate the impact of cocoa's impending inclusion in the Bloomberg Commodity Index in January, as the anticipated $1.9 billion in passive fund inflows could trigger a significant short-covering rally.
• Consider the implications of the record net-short positioning in London cocoa, which presents a substantial short-squeeze risk despite current weak demand and strong harvest forecasts.