Concerns of Tight Supplies Push Cocoa Prices Higher

Cocoa prices rallied to 2-week highs, driven by concerns over slowing Ivory Coast exports and poor mid-crop quality, with processors reporting 5-6% of beans being substandard compared to 1% during the main crop. Despite recent rains, drought conditions persist in key West African growing regions. Bearish factors include rebounding cocoa inventories in U.S. ports and concerns that high prices and tariffs will reduce consumer demand, as evidenced by Barry Callebaut's reduced sales guidance and Hershey's Q1 sales decline of 14%.

Analysis

Cocoa prices (CCN25, CAN25) have extended their rally to two-week highs, with July ICE NY cocoa closing up +1.82% and July ICE London cocoa up +3.40%, primarily driven by a slowing pace of Ivory Coast cocoa exports which signals tightening future supplies. While Ivory Coast shipments from October 1 to June 1 are up +6.7% year-over-year at 1.6 MMT, this growth has decelerated significantly from the +35% increase observed in December. Persistent drought conditions, covering over a third of Ghana and Ivory Coast despite recent rains, and significant quality concerns regarding the Ivory Coast's mid-crop, with processors rejecting beans due to 5-6% poor quality compared to 1% in the main crop, further buttress supply anxieties. The Ivory Coast mid-crop estimate is 400,000 MT, down -9% from last year. Ghana, the second-largest producer, also cut its 2024/25 harvest forecast to 617,500 MT, down -5% from an August estimate. 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 down -13.1% y/y and the stocks/grindings ratio at a 46-year low of 27.0%. Countervailing these bullish factors, ICE-monitored cocoa inventories in US ports have rebounded to an 8-1/2 month high of 2,238,954 bags. Furthermore, consumer demand is showing signs of weakness due to high prices and potential tariff impacts; Barry Callebaut AG reduced its annual sales guidance, Hershey Co. (HSY) reported a 14% Q1 sales fall and anticipates $15-$20 million in Q2 tariff costs, and Mondelez International (MDLZ) reported weaker-than-expected Q1 sales. However, Q1 global cocoa grindings, while down year-over-year (North America -2.5%, Europe -3.7%, Asia -3.4%), fell less than market expectations, suggesting some resilience in demand. Looking ahead, the ICCO forecasts a global cocoa surplus of 142,000 MT for 2024/25, the first in four years, with production projected to rise +7.8% y/y.

Key Decisions for Investors

• Investors should monitor the evolving supply situation in West Africa, particularly export paces, mid-crop quality reports, and weather patterns, as these remain key short-term price drivers.
• Consider the dichotomy between current supply tightness and emerging demand headwinds, evidenced by major chocolate manufacturers like Hershey (HSY) and Mondelez (MDLZ) reporting sales pressure from high prices and tariffs.
• Factor in the ICCO's projection of a return to surplus in the 2024/25 season, which could exert downward pressure on prices in the medium to long term, despite the current historic deficit.
• Note the rebound in US port inventories as a potential early indicator of easing physical tightness, though global stocks remain historically low.