Cocoa Prices Drop as Dollar Rises: A Closer Look at Market Trends
Market Overview
On Thursday, March ICE NY cocoa (CCH25) closed down -538 (-4.61%), while March ICE London cocoa #7 (CAH25) saw a decrease of -169 (-1.85%). Sharp declines in cocoa prices were attributed to a rise in the dollar index (DXY00) to a two-year high, prompting long liquidation in cocoa futures. However, losses in London cocoa were somewhat cushioned as the British pound (^GBPUSD) hit an 8-1/4 month low, making cocoa more favorable when priced in sterling.
Production Concerns Heat Up
Earlier this week, worries about crop production in West Africa sparked fund buying of cocoa futures. Cocoa farmers in Ivory Coast and Nigeria reported that their cocoa trees are struggling due to the seasonal dry and dusty Harmattan winds, causing leaves to yellow and cocoa pods, known as cherelles, to wither. The market has been experiencing thin holiday trading conditions and rising margin calls, which have contributed to a decrease in liquidity and increased price volatility.
Historical Context and Recent Developments
On December 18, NY Cocoa reached an all-time nearest-futures high, while London Cocoa hit an eight-month nearest-futures high due to a deteriorating outlook for the mid-crop in West Africa. Maxar Technologies has warned that the dry conditions in West Africa could negatively impact the early stages of the mid-year cocoa crop, which is expected to be harvested in April. Additionally, over the past 1-1/2 years, ICE-monitored cocoa inventories located in U.S. ports have steadily declined, reaching a 20-year low of 1,361,633 bags as of Thursday.
Global Cocoa Supply Shortages
On December 20, Ghana reduced its 2024/25 (Sep-Aug) cocoa harvest forecast by 5% due to weather-related issues. This marks the second downward revision this season. Furthermore, the International Cocoa Association (ICCO) updated its global cocoa deficit estimate on November 22, raising it to -478,000 MT from a previous estimate of -462,000 MT. This represents the largest deficit in over 60 years. The ICCO also revised down its production estimate for 2023/24 to 4.380 MMT, a reduction of 13.1% year-over-year, forecasting a stocks-to-grindings ratio of 27.0%, the lowest in 46 years.
Weather Effects and Crop Quality
Recent heavy rainfall in West Africa has led to high mortality rates among cocoa buds. The flooding in Ivory Coast has increased the risk of disease and negatively affected crop quality. Newly harvested cocoa beans from the region show lower quality, with bean counts around 105 per 100 grams. In contrast, the Ivory Coast’s cocoa regulator permits exporters to purchase beans with counts between 80 to 100 for every 100 grams, with lower counts signifying better quality.
Export Trends Indicate Price Pressure
Despite these challenges, news of continued high cocoa shipments from Ivory Coast— the world’s largest producer—adds downward pressure on prices. Recent government data revealed that from October 1 to December 29, farmers in the Ivory Coast shipped 1.05 MMT of cocoa to ports, marking a 27% increase from 824,730 MT shipped during the same timeframe last year. Additionally, Nigerian cocoa exports surged, rising 35% year-over-year in November to 38,015 MT, further contributing to market pressures.
Regional Demand Insights
Global cocoa demand figures are mixed. The National Confectioners Association noted on October 17 that North America experienced a 12% year-over-year increase in Q3 cocoa grindings, reaching 109,264 MT. Similarly, the Cocoa Association of Asia reported a 2.6% rise in Q3 grindings, totaling 216,998 MT. Conversely, the European Cocoa Association noted a decline of 3.3% in European cocoa grindings year-over-year, amounting to 354,335 MT.
Outlook for Ghana
Ghana’s Cocoa Board (Cocobod) previously reduced its 2024/25 cocoa production estimate on August 20 to 650,000 MT from an earlier forecast of 700,000 MT due to unfavorable weather and crop disease. The 2023/24 cocoa harvest in Ghana, the world’s second-largest cocoa producer, reached a 23-year low of 425,000 MT.
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 are for informational purposes only. 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.
