Cocoa Prices Extend Their Slump as Supply Fears Fade

Cocoa prices are experiencing mixed trading, extending a two-month decline to multi-month lows, as expectations of increased supply from Ivory Coast and Ghana due to higher farmer payments and an improved crop outlook weigh on the market. This bearish sentiment is exacerbated by fears of demand destruction from high prices, evidenced by reduced sales guidance from major confectioners like Lindt & Sprüngli and Barry Callebaut, and significant declines in Q2 global cocoa grindings. However, some support emerges from mild fund short covering, tightening US inventories, reduced Ivory Coast exports, quality concerns for its mid-crop, and projected lower Nigerian production, creating a complex outlook as the market transitions from a record 2023/24 deficit to a forecasted 2024/25 surplus.

Analysis

Cocoa prices are experiencing a mixed trading session, extending a two-month decline, with NY cocoa reaching a 20-month nearest-futures low and London cocoa a 20.5-month low. This pressure stems from expectations of increased supply, driven by higher farmer payments in Ivory Coast and Ghana, and an improved crop outlook in West Africa, with Mondelez noting a 7% increase in pod counts above the five-year average.

Simultaneously, demand destruction fears are materializing, evidenced by major chocolate makers' revised guidance. Lindt & Sprüngli lowered its margin guidance due to a larger-than-expected decline in first-half chocolate sales, while Barry Callebaut reduced its sales volume guidance twice, reporting a -9.5% drop in sales volume for March-May, its biggest quarterly decline in a decade. Global Q2 cocoa grindings also showed significant year-over-year declines: -7.2% in Europe, -16.3% in Asia, and -2.8% in North America.

Despite these bearish trends, several factors offer some price support. ICE-monitored cocoa inventories in US ports fell to a 5.75-month low, and Ivory Coast exports slowed significantly, shipping 48,753 MT from October 1-11 compared to 100,264 MT last year. Quality concerns for the Ivory Coast's mid-crop and a projected -11% year-over-year decline in Nigeria's 2025/26 cocoa production also provide underlying support.

The International Cocoa Organization (ICCO) revised the 2023/24 global deficit to a 60-year high of -494,000 MT, with the stocks-to-grindings ratio at a 46-year low of 27.0%. However, ICCO forecasts a 2024/25 surplus of 142,000 MT, projecting a 7.8% increase in production, while fund positioning shows a significant net-short in London cocoa, the largest in over three years, which could fuel a short-covering rally.

Key Decisions for Investors

• Investors should closely monitor Q3 global cocoa grinding data for further demand erosion signals, given recent corporate guidance and Q2 declines
• Evaluate the potential for a short-covering rally, as record net-short positioning in London cocoa could temporarily buoy prices despite bearish supply fundamentals
• Assess the long-term supply outlook, balancing current inventory tightness and export slowdowns against the ICCO's forecast for a 2024/25 surplus
• Consider the impact of increased West African farmer payments on future supply elasticity and sustained price pressure if demand remains constrained