Cocoa Prices Fall on the Outlook for Ample Global Supplies

Cocoa prices continued their decline, reaching multi-month lows, driven by expectations of increased global supply from Ghana and Ivory Coast, alongside significant demand weakness reflected in chocolate makers' lowered guidance and declining global grinding data. This bearish sentiment for the upcoming season, including an ICCO forecast for a 2024/25 surplus, contrasts with the prior season's record deficit and current tight U.S. inventories, creating a complex supply outlook.

Analysis

Cocoa futures have retreated to multi-month lows, with NY cocoa hitting an 11-month low and London cocoa a 19-month low, driven by a confluence of bearish supply and demand signals for the upcoming season. The primary driver is the expectation of an abundant global supply, evidenced by a surge in Ghanaian cocoa deliveries to 50,440 MT in a recent four-week period, compared to just 11,000 MT a year prior. This is reinforced by a positive crop outlook in the Ivory Coast, where Mondelez reports pod counts are 7% above the five-year average, and the International Cocoa Organization (ICCO) forecasts a 142,000 MT global surplus for 2024/25—the first in four years. Simultaneously, demand is weakening significantly, a trend confirmed by major chocolate makers like Lindt & Sprüngli and Barry Callebaut lowering guidance. Barry Callebaut's reported -9.5% sales volume decline for the March-May period marks the largest quarterly drop in a decade. This demand destruction is further corroborated by sharp year-over-year declines in Q2 cocoa grindings in Europe (-7.2%), Asia (-16.3%), and North America (-2.8%). These bearish factors are currently overshadowing residual bullish signals, such as the record -494,000 MT deficit from the 2023/24 season, a 46-year low stocks-to-grindings ratio, and tighter spot inventories in US ports.

Key Decisions for Investors

• Given the strong evidence of a shift to a global supply surplus and significant demand destruction, investors should consider a bearish stance on cocoa futures, as the fundamental drivers point to continued price weakness.
• The sharp decline in cocoa input costs presents a potential future tailwind for chocolate manufacturers like Mondelez and Barry Callebaut; investors should monitor for signs that margin pressures are easing, which could create upside for these equities.
• Traders should closely monitor the progress of the Ivory Coast's main crop harvest and upcoming global grinding data, as these will be key catalysts confirming or contradicting the current surplus narrative.
• Despite the bearish outlook, the historically low stocks-to-grindings ratio and isolated supply issues in Nigeria and the Ivory Coast's mid-crop present upside price risk, warranting defined risk management for short positions.