Market Update: Cocoa Prices Decline Amid Quality Concerns and Inventory Rebound

July ICE NY cocoa (CCN25) closed down -130 (-1.41%) on Thursday, while July ICE London cocoa #7 (CAN25) dropped -128 (-1.91%).

Market Dynamics Affect Cocoa Prices

On Thursday, cocoa prices reversed an early gain to post moderate losses. This shift came as the dollar index (DXY00) surged to a 3-1/2 week high, generating some long liquidation pressure in cocoa futures following a rally earlier in the week.

Initially, cocoa prices showed strength, with NY cocoa reaching a one-week high and London cocoa climbing to a one-month high. Ongoing quality issues with the Ivory Coast’s mid-crop, now in harvest, have contributed to price support. Cocoa processors expressed concern as they reported rejecting truckloads due to poor-quality beans, estimating that 5% to 6% of the mid-crop cocoa was substandard, compared to just 1% during the main crop.

Supply Concerns and Quality Issues

According to Rabobank, the diminished quality of the Ivory Coast’s mid-crop results from late rain that hindered growth. The mid-crop, which is smaller than the main harvest, typically starts in April. This year’s mid-crop is estimated at 400,000 MT, a 9% decline from last year’s 440,000 MT.

On April 25, NY cocoa reached a 2-1/2 month high due to concerns over supply, as the pace of Ivory Coast cocoa exports slowed. Government data showed that from October 1 to May 3, Ivory Coast farmers exported 1.53 MMT of cocoa, an 11.7% increase from the previous year, but significantly down from a 35% rise reported in December.

Demand Concerns Intensify

Demand concerns affected cocoa prices considerably last Wednesday, as Hershey Co. reported a 14% drop in Q1 sales, forecasting $15-$20 million in tariff costs in Q2. This situation is expected to drive chocolate prices higher and dampen consumer demand. Additionally, Mondelez International reported weaker-than-expected Q1 sales, noting that consumers are reducing snack purchases amid economic uncertainty and elevated chocolate prices.

Inventory Levels and Global Supply Analysis

A rebound in cocoa inventories poses a bearish outlook. After falling to a 21-year low of 1,263,493 bags on January 24, ICE-monitored cocoa inventories in US ports rose to a 7-1/4 month high of 2,107,210 bags by Wednesday.

Moreover, Nigeria’s cocoa exports increased by 24% year-on-year to 27,564 MT, providing some negative carryover for cocoa prices. However, there are also signs of better-than-expected global cocoa demand. Q1 cocoa grindings in North America fell by only 2.5% year-on-year to 110,278 MT, and European grindings dropped by 3.7% to 353,522 MT, both better than anticipated declines.

Future Outlook and Surplus Predictions

Concerns linger that consumer demand may decline as the global trade war escalates, leading to higher cocoa prices. On April 10, Barry Callebaut AG, a major chocolate manufacturer, revised its annual sales guidance down due to the uncertainty surrounding cocoa prices and tariffs.

On February 28, the International Cocoa Organization (ICCO) projected a global cocoa surplus of 142,000 MT for the 2024/25 season, which would mark the first surplus in four years. Additionally, ICCO anticipates a 7.8% increase in global cocoa production to 4.84 MMT.

Meanwhile, decreased cocoa supplies from Ghana, the second-largest cocoa producer, support prices. Cocobod, Ghana’s cocoa regulator, recently revised its 2024/25 cocoa harvest forecast down to 617,500 MT, a 5% reduction from its August estimate.

ICCO also reported a significant global cocoa deficit of 441,000 MT for the 2023/24 period, the largest in over 60 years, with production down 13.1% year-on-year to 4.380 MMT. The stocks-to-grindings ratio for global cocoa now stands at 27.0%, a 46-year low.

On the date of publication, Rich Asplund did not hold any positions in the securities mentioned in this report. All information in this article is for informational purposes. Please refer to the Barchart Disclosure Policy for more details.

More news from Barchart

The views expressed in this article are those of the author and do not necessarily reflect those of Nasdaq, Inc.