Cocoa Prices Drop Amid Market Volatility and Global Supply Concerns
Sharp Decline in Cocoa Prices Linked to Dollar Strength and Supply Tightness
March ICE NY cocoa (CCH25) closed down -357 (-3.27%) on Friday, while March ICE London cocoa #7 (CAH25) fell -224 (-2.54%). Cocoa prices experienced a significant drop as the dollar index (DXY00) reached a 2-year high, leading to long liquidation pressures in cocoa futures. However, losses in London cocoa were partially offset, as the British pound (^GBPUSD) slid to a 14-month low, providing some support for cocoa priced in sterling.
Market Reactions to Hershey’s Cocoa Purchase Proposal
This week, cocoa prices exhibited volatility. On Thursday, a rally occurred after chocolate manufacturer Hershey Co announced plans to seek CFTC approval for a major cocoa purchase through the ICE Futures Exchange due to tight global supplies. According to Bloomberg, Hershey aims to secure more than 90,000 metric tons (MT) of cocoa on ICE Futures US, which is over nine times the current allowed purchase size. This proposed volume also surpasses the federal position limit of 4,900 contracts, or 49,000 MT, set by the CFTC. Due to drastic global cocoa shortages, it is currently less expensive to take delivery through the New York exchange than through physical market purchases.
Declining Cocoa Stockpiles Favor Price Increases
Decreasing global cocoa inventories are contributing to a bullish trend. ICE-monitored cocoa stocks in U.S. ports have been falling for the past year and a half, reaching a 20-year low of 1,315,922 bags on Friday.
Market Strategies and Export Concerns
Earlier in the week, cocoa prices dipped to one-week lows amid long liquidation following an announcement from ICE Futures Europe. The exchange tightened accountability levels for London cocoa, requiring traders exceeding specific position thresholds to disclose more information starting January 13. Conversely, on Monday, cocoa prices increased to two-week highs due to apprehensions about slowing cocoa exports from Ivory Coast, which are expected to tighten global supplies. Although farmers shipped 1.11 MMT of cocoa to ports so far this marketing year—up over 27% from last year—the growth rate has slowed from a 35% increase last month.
Weather Impact on Cocoa Production
Concerns over crop production in West Africa are also influencing cocoa prices. Farmers in both Ivory Coast and Nigeria have reported that cocoa trees are beginning to struggle under the effects of seasonal dry and dusty Harmattan winds, resulting in yellowing leaves and withering cocoa pods.
Cocoa Market History and Deficit Estimates
In recent milestones, on December 18, NY Cocoa reached an all-time nearest-futures high, while London Cocoa hit its highest point in eight and a half months due to a deteriorating mid-crop outlook in West Africa. Maxar Technologies has warned that dry conditions will adversely affect the early development of the mid-year cocoa crop, which will be harvested in April, and the arrival of the seasonal Harmattan winds could further exacerbate these conditions.
On November 22, the International Cocoa Association (ICCO) raised its 2023/24 global cocoa deficit estimate to -478,000 MT, the largest shortfall in over 60 years. This updated forecast followed a reduction in ICCO’s cocoa production estimate to 4.380 MMT, a decrease of 13.1% year-on-year. The ICCO has projected a 2023/24 global cocoa stocks/grindings ratio of 27.0%, marking a 46-year low.
Quality Concerns Amid Heavy Rainfall
Heavy rainfall in West Africa has raised concerns about high mortality rates among cocoa buds and has pushed cocoa prices higher. The flooding in the Ivory Coast has not only affected field conditions but has also increased the risk of disease and impacted overall crop quality. Recent samples from Ivory Coast indicate lower quality, with an average count of about 105 beans per 100 grams. The country’s cocoa regulator permits exporters to purchase bean counts ranging from 80 to 100 per 100 grams, with the best cocoa having lower counts.
Nigeria’s Export Growth Challenges Prices
On the other hand, improved cocoa exports from Nigeria, which ranks as the world’s sixth-largest producer, may add downward pressure on prices. In November, Nigerian cocoa exports rose by 35% year-on-year, totaling 38,015 MT.
Mixed Global Cocoa Demand Signals
Recent global cocoa demand reports showed mixed results. The National Confectioners Association noted on October 17 that North American Q3 cocoa grindings climbed by 12% year-on-year to 109,264 MT. In Asia, the Cocoa Association reported a 2.6% year-on-year increase in Q3 cocoa grindings, totaling 216,998 MT. Conversely, European cocoa grindings fell by 3.3% year-on-year to 354,335 MT, according to the European Cocoa Association.
Support for cocoa prices emerged after Ghana’s Cocoa Board (Cocobod) on August 20 reduced its 2024/25 Ghana cocoa production estimate to 650,000 MT, down from a previous June forecast of 700,000 MT. Adverse weather and crop diseases significantly impacted Ghana’s cocoa harvest, which has hit a 23-year low of 425,000 MT. As the world’s second-largest cocoa producer, Ghana’s struggles contribute to the global cocoa supply uncertainty.
On the date of publication,
Rich Asplund
did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
