Cocoa prices have recently experienced a significant downturn, with July futures on the ICE NY exchange slipping $524, or approximately 5.44%, while London cocoa futures fell by $305, or 4.69%. This decline marks a continuation of a week-long selloff, pushing New York cocoa to a two-and-a-half-week low and London cocoa to a three-week low. The drop in prices can be attributed to favorable weather conditions in West Africa, which is poised to enhance cocoa crop development in this pivotal cocoa-producing region.
The dynamics of cocoa pricing are further influenced by a notable recovery in current inventories. Following a dramatic decline to a 21-year low of 1,263,493 bags on January 24, cocoa stocks monitored by ICE at U.S. ports have surged, reaching an 8.25-month high of 2,197,579 bags as of Thursday. Such an inventory rebound typically exerts bearish pressure on prices, suggesting a more stable supply environment, at least in the near term.
Despite recent rains, which initially sparked optimism regarding crop yields, drought conditions continue to affect more than one-third of cocoa crops in Ghana and Côte d’Ivoire. This phenomenon has raised concerns about future supply disruptions. While farmers from Côte d’Ivoire managed to ship 1.6 million metric tons of cocoa by May 25 in the current marketing year, representing a 9.6% increase from the previous year, this figure is dwarfed by the startling 35% surge observed in December, indicating a potential slowdown in export activity as the year progresses.
The quality of the ongoing mid-crop harvest in Côte d’Ivoire has raised flags among cocoa processors. Complaints point to a significant decline in the quality of cocoa beans, with reports suggesting that 5% to 6% of the mid-crop being rejected due to poor quality—a stark contrast to the 1% rejection rate seen during the main crop. This deterioration is linked to erratic weather patterns in the region, which have hampered optimal crop growth.
Analysts from Rabobank have attributed the quality issues to late rains that affected crop development. Typically, the mid-crop, harvested from April through September, yields lower volumes than the main crop. Current estimates suggest that the Ivory Coast’s mid-crop will reach approximately 400,000 metric tons in 2023, reflecting a decline of 9% from the previous year’s total of 440,000 metric tons.
Adding another layer of complexity to the market are concerns surrounding consumer demand for cocoa and its derivatives. Recent tariff discussions are casting a long shadow over future pricing, as high costs could deter demand. Major chocolate manufacturers such as Barry Callebaut AG and Hershey Co. are facing headwinds from anticipated tariffs, leading Barry Callebaut to revise its annual sales projection downward. Hershey reported a 14% decrease in its first-quarter sales and anticipates tariff-related costs of $15 million to $20 million in the upcoming quarter, a situation likely to escalate chocolate prices further.
Concerningly, Mondelēz International also registered disappointing Q1 sales, attributing the decline to economic challenges forcing consumers to reduce snack purchases.
Despite these pressures, the cocoa market has shown some resilience with better-than-predicted global demand indicators. For instance, North American cocoa grindings saw a lesser decline than anticipated, falling by 2.5% year-on-year to reach 110,278 metric tons. Similarly, European and Asian grindings reported smaller-than-expected drops of 3.7% and 3.4%, respectively.
Moreover, cocoa prices are supported by tighter supply conditions emerging from Ghana, the world’s second-largest cocoa producer. Ghana’s cocoa regulator, Cocobod, recently cut its forecast for the 2024/25 cocoa harvest for the second time within a single season, now projecting production at 617,500 metric tons—a 5% decrease from previous estimates.
The International Cocoa Organization (ICCO) has ongoing concerns about the industry, forecasting a global cocoa deficit of 441,000 metric tons for the 2023/24 season, marking the most significant deficit seen in over six decades. This situation is compounded by an anticipated production drop of 13.1%, resulting in projected output of 4.38 million metric tons. Interestingly, the ICCO posits that the 2024/25 cocoa season may herald a surplus of 142,000 metric tons, the first such occurrence in four years, with production expected to rebound by 7.8% to reach 4.84 million metric tons.
As market observers assess the multifaceted implications of these developments, it is clear that cocoa pricing remains at the nexus of climatic variability, market demands, and global economic conditions. The intertwining of these factors will undoubtedly shape the trajectory of cocoa futures in the months to come, compelling stakeholders to navigate the nuanced landscape of cocoa production, consumption, and pricing. Stakeholders will need to monitor not only agricultural yields but also broader economic indicators and consumer behaviors as these elements coalesce to influence cocoa market dynamics.