Cocoa Prices Pressured by Beneficial Rain in West Africa

Cocoa prices declined on Monday due to forecasts of increased rainfall in West Africa, potentially improving crop prospects in the Ivory Coast and Ghana, the world's top cocoa producers. Despite this, prices maintain underlying support from slowing Ivory Coast cocoa exports and concerns about the quality of the Ivory Coast's mid-crop, with processors reporting a higher percentage of poor-quality beans; the ICCO also revised its 2023/24 global cocoa deficit to -494,000 MT. Bearish factors include rising ICE-monitored cocoa inventories in U.S. ports and concerns that high cocoa prices and potential tariffs will reduce consumer demand, as evidenced by reduced sales guidance from Barry Callebaut and declining sales reported by Hershey and Mondelez.

Analysis

Cocoa prices experienced a modest retreat, with July ICE NY cocoa closing down -0.83% and July ICE London cocoa down -0.32%, primarily due to forecasts of continued rainfall in West Africa, which could benefit crop prospects in Ivory Coast and Ghana. Despite this, underlying support for prices remains due to several factors: Ivory Coast cocoa shipments, while up +6.7% year-to-date as of June 1, show a significant deceleration from the +35% increase seen in December, signaling potentially tighter future supplies. Persistent drought conditions still affect over a third of Ghana and Ivory Coast. Significant quality concerns plague the Ivory Coast's mid-crop, with processors rejecting beans due to 5-6% poor quality per truckload, compared to 1% during the main crop; Rabobank attributes this to late rains. The Ivory Coast's mid-crop estimate is 400,000 MT, down -9% year-over-year. Further supporting prices, Ghana's Cocobod reduced its 2024/25 cocoa harvest forecast to 617,500 MT, a -5% decrease from an August estimate. The International Cocoa Organization (ICCO) has exacerbated supply concerns by revising its 2023/24 global cocoa deficit to -494,000 MT, the largest in over 60 years, with 2023/24 production falling -13.1% year-over-year and the stocks/grindings ratio hitting a 46-year low of 27.0%. Conversely, bearish pressure stems from rising ICE-monitored cocoa inventories in US ports, which climbed to an 8-3/4 month high of 2,259,665 bags. Consumer demand is a significant concern, with fears that high prices and tariffs will dampen consumption. Barry Callebaut AG reduced its annual sales guidance, Hershey Co. reported a -14% Q1 sales decline and anticipates $15-$20 million in Q2 tariff costs, and Mondelez International noted weaker Q1 sales due to consumer cutbacks. However, Q1 cocoa grindings in North America (-2.5% y/y), Europe (-3.7% y/y), and Asia (-3.4% y/y) fell less than anticipated, 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 global production projected to rise +7.8% y/y to 4.84 MMT, which could weigh on prices if realized.

Key Decisions for Investors

• Investors should anticipate continued volatility in cocoa futures (CCN25, CAN25) given the conflicting signals from West African weather improvements versus deep-seated supply deficits and quality issues; short-term positions require careful risk management.
• Closely monitor upcoming weather reports from West Africa, Ivory Coast mid-crop quality assessments, and export figures, as these will be critical near-term price catalysts.
• For equity holdings, particularly in companies like Hershey (HSY) and Mondelez (MDLZ), scrutinize upcoming earnings for further evidence of consumer demand elasticity and margin compression due to high cocoa costs and tariff impacts, noting the current negative sentiment.
• Factor in the ICCO's projection of a 142,000 MT surplus for the 2024/25 season as a potential medium-term bearish influence on cocoa prices, contingent on the materialization of the forecasted +7.8% production increase.