Cocoa Prices Fall on Rising ICE Cocoa Inventories

Cocoa futures declined after ICE-monitored cocoa inventories in U.S. ports rose to a 7-3/4 month high, offsetting earlier gains driven by concerns over slowing Ivory Coast exports and West African weather. Despite a projected global cocoa deficit, the increase in inventories and fears of waning consumer demand due to high prices and potential tariffs are weighing on the market, as evidenced by Barry Callebaut's sales guidance cut and Hershey's Q1 sales decline. However, better-than-expected global cocoa grindings data provided some support, indicating resilient near-term demand.

Analysis

Cocoa prices experienced a notable downturn, with July ICE NY cocoa futures declining -0.51% after reaching a 3.5-month high, primarily due to a significant increase in ICE-monitored cocoa inventories held in US ports, which climbed to a 7-3/4 month high of 2,156,644 bags, prompting long liquidation. This rise in inventories from a 21-year low recorded on January 24 contrasts with ongoing supply concerns. Ivory Coast cocoa exports, though up +10.5% year-to-date (Oct 1 - May 18), have slowed from the +35% increase seen in December. Persistent drought in West Africa, affecting over a third of Ghana and Ivory Coast, and severe quality issues with the Ivory Coast's mid-crop—processors report 5-6% poor quality beans per truckload compared to 1% in the main crop—are supporting prices. The Ivory Coast's mid-crop is estimated at 400,000 MT, a 9% decrease from last year. Conversely, fears of waning consumer demand due to high prices and potential tariffs are pressuring the market, as highlighted by Barry Callebaut's reduced sales guidance, Hershey Co.'s 14% Q1 sales drop and anticipated $15-$20 million in Q2 tariff costs, and Mondelez International's weaker Q1 sales. Despite these demand concerns, Q1 global cocoa grindings were better than expected, with North American grindings down -2.5% (vs. exp. -5%), European down -3.7% (vs. exp. -5%), and Asian down -3.4% (vs. exp. -5%), indicating some near-term demand resilience. Ghana's 2024/25 cocoa harvest forecast was also cut 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 the stocks/grindings ratio at a 46-year low of 27.0%. However, the ICCO forecasts a global surplus of 142,000 MT for 2024/25, with production expected to rise +7.8% y/y to 4.84 MMT, which could alleviate long-term tightness.

Key Decisions for Investors

• Investors should closely monitor the evolution of US port inventories and West African weather and crop quality reports, as these are currently key conflicting short-term price drivers.
• Given the negative sales reports from major chocolate manufacturers like Hershey (HSY), Mondelez (MDLZ), and Barry Callebaut (BRN) citing high prices and consumer pullback, it is prudent to assess the risk of further demand destruction despite better-than-expected Q1 grindings.
• Consider the ICCO's projection of a return to a global cocoa surplus in 2024/25, which, if realized, could temper long-term price appreciation and warrants a cautious stance on positions extending significantly beyond the current crop year.