Cocoa Prices Drop as Market Reacts to Crop Woes and Export Concerns

March ICE NY cocoa (CCH25) today is down -69 (-0.68%), while March ICE London cocoa #7 (CAH25) decreased -2 (-0.02%).

Shift in Market Dynamics

Cocoa prices retreated from an early gain after a rise in the dollar index (DXY00) to a one-week high prompted investors to liquidate long positions in cocoa futures.

Weather Woes Impacting Crop Conditions

Initially, cocoa prices continued their advance from Tuesday, driven by concerns over cocoa crops in the Ivory Coast and Ghana. Farmers in these countries reported inadequate rainfall over the past two weeks, which has hampered the growth of cocoa trees.

Export Slowdown Raises Concerns

Concerns about declining cocoa exports from the Ivory Coast are also contributing to price movements. Although government data indicated that farmers shipped 1.32 million metric tons (MMT) of cocoa to ports as of February 9, a 21% increase from last year, the growth rate has decreased from 35% in December.

Demand for Cocoa Continues to Slide

Throughout the past week, cocoa prices have felt the weight of falling demand, hitting two-month lows last Friday. Last Thursday, Hershey reported that soaring cocoa prices are forcing it to alter its recipes, substituting cocoa with other ingredients. Similarly, Mondelez International highlighted reduced chocolate consumption in North America, raising concerns about slowing demand.

A Decline in Cocoa Grindings

High cocoa prices significantly impacted demand in Q4. On January 9, the European Cocoa Association reported a 5.3% year-over-year drop in European cocoa grindings to 331,853 MT, the lowest in over four years. Likewise, the Cocoa Association of Asia noted a 0.5% yearly decline to 210,111 MT, also a four-year low. The National Confectioners Association confirmed a 1.2% drop in North American cocoa bean grindings to 102,761 MT during this period.

Global Supply Concerns Strengthen Price Support

Concerns about crop production in West Africa are contributing positively to cocoa prices. Maxar Technologies reported that this year’s Harmattan winds are the driest seen in six years, exacerbating crop conditions. Farmers in the Ivory Coast and Ghana have noticed adverse effects on cocoa trees, including yellowing leaves and withering cocoa pods.

Worsening Global Cocoa Deficit

The outlook for the global cocoa deficit is deteriorating, bolstering price support. On January 24, the International Cocoa Organization (ICCO) highlighted that global cocoa stockpiles are expected to total 1.041 MMT by the end of the 2023/24 season, a 36% decrease year-over-year. This is lower than an earlier estimate of 1.300 MMT, suggesting a potentially larger deficit of 478,000 MT than expected.

Low Inventories Fuel Market Prices

Global cocoa inventories continue to tighten, which is another bullish factor for prices. Inventory levels at US ports monitored by ICE have been declining for the past 18 months, recently hitting a 21-year low of 1,263,493 bags.

Potential Large Orders by Hershey

Cocoa prices are also supported by Hershey Co.’s recent request for approval from the CFTC to purchase over 90,000 MT of cocoa through the ICE Futures Exchange. This purchase is significantly larger than the exchange’s standard limits, indicating the severity of global supply shortages.

Highs Recorded Amid Production Challenges

A notable peak in cocoa prices occurred on December 18, with NY Cocoa reaching an all-time nearest-futures high. London Cocoa also hit a nine-month nearest-futures high due to concerns over the West African cocoa mid-crop outlook. Maxar Technologies warned that ongoing dry conditions in West Africa could hinder the early development of cocoa crops expected to be harvested in April.

Adjustments in Global Production Estimates

In a recent projection, the ICCO raised its 2023/24 global cocoa deficit estimate to 478,000 MT, the largest in over 60 years, revising its production forecast down to 4.380 MMT, a 13.1% decline year-over-year. The ICCO’s forecast reflects a grim stocks-to-grindings ratio of only 27.0%, a 46-year low.

Increased Exports and Shifting Production Outlook

Nigeria’s cocoa exports present a bearish element; exports surged 87% year-over-year to 46,696 MT in December. Additionally, the Ivory Coast recently increased its 2024/25 production estimate to a range of 2.1-2.2 MMT, adding competitive pressure to the market.

Conversely, Ghana’s Cocoa Board cut its 2024/25 production estimate to 650,000 MT, down from 700,000 MT due to adverse weather and crop disease. The nation faced its lowest cocoa harvest in 23 years at 425,000 MT for 2023/24, highlighting the challenges within the sector.

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.

More news from Barchart

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.