Cocoa Prices Fall on Expectations for Weak Q2 Demand Figures

Cocoa prices declined significantly on Wednesday, primarily due to escalating demand concerns, evidenced by a -22% year-over-year drop in Malaysian Q2 processing, an anticipated -5% decline in European Q2 grindings, and chocolate maker Barry Callebaut's reduced sales volume guidance. This demand weakness, alongside rising ICE-monitored inventories and projections for increased Ghanaian output, is tempering the impact of a record 2023/24 global deficit and quality issues with Ivory Coast's mid-crop, as the market increasingly focuses on the International Cocoa Organization's forecast for a 2024/25 global surplus.

Analysis

Cocoa prices are under significant pressure as evidence of demand destruction begins to outweigh concerns about the historically tight 2023/24 supply. The market is reacting to a cascade of negative demand signals, including a confirmed -22% year-over-year drop in Q2 Malaysian cocoa processing and a consensus forecast for a -5% decline in European Q2 grindings. This trend is corroborated by major chocolate manufacturer Barry Callebaut, which reduced its sales volume guidance after reporting a -9.5% drop in sales volume for its March-May quarter, the largest such decline in a decade. On the supply side, bearish factors are accumulating, including ICE-monitored inventories rising to a 10-month high and Ghana's projection of an 8.3% increase in its 2025/26 crop. While the International Cocoa Organization (ICCO) has confirmed a record global deficit of -494,000 MT for the 2023/24 season and a 46-year low for the stocks-to-grindings ratio, the market appears to be looking past this, focusing instead on the ICCO's forecast for a 142,000 MT surplus in 2024/25. The current price action suggests investors are prioritizing forward-looking supply recovery and demand weakness over the acute tightness of the spot market.

Key Decisions for Investors

• Given the compelling evidence of demand destruction from key industry players and processing data, the path of least resistance for cocoa prices appears to be lower in the near term.
• The upcoming European Q2 grinding figures represent a critical catalyst; a sharper-than-expected decline of more than -5% would likely reinforce the bearish trend, whereas a surprise beat could offer temporary price support.
• Despite the current bearish momentum, investors should remain cognizant of the underlying physical market tightness, including the record 2023/24 deficit and quality issues in the Ivory Coast, as any disruption to the anticipated 2024/25 supply recovery could trigger a sharp price reversal.