Cocoa futures have fallen to their lowest point in 20 months, with New York prices dropping significantly. The decline is driven by a combination of factors, including expectations of increased supply from major West African producers and growing evidence of weakening global demand for chocolate.
Recent government actions in Ivory Coast and Ghana, the world's top cocoa-producing nations, are expected to boost the flow of beans to the market. Simultaneously, major chocolate manufacturers have reported slowing sales, signaling that high prices may be discouraging consumers.
Key Takeaways
- New York cocoa futures reached a 20-month low, extending a recent slump in prices.
- Increased payments to farmers in Ivory Coast and Ghana are anticipated to increase cocoa supply.
- Major chocolate companies like Lindt & Sprüngli and Barry Callebaut have reported declining sales volumes, indicating weaker consumer demand.
- While the near-term outlook is bearish, factors like low inventories and quality concerns in some regions could provide future price support.
- The International Cocoa Organization (ICCO) forecasts a market surplus for the 2024/25 season, the first in four years.
Supply Outlook Brightens in West Africa
A primary driver behind the recent price drop is the improving supply forecast from West Africa, which dominates global cocoa production. The governments of Ivory Coast and Ghana recently increased the prices they pay to local farmers for their cocoa beans. This policy change is designed to encourage farmers to sell their crops through official channels, which is expected to increase the available supply on the global market.
The harvest outlook also appears positive. According to chocolate maker Mondelez, the latest cocoa pod count in West Africa is 7% above the five-year average and significantly higher than last year's crop. Farmers in the Ivory Coast, the world's largest producer, are reportedly optimistic about the quality of the main crop, which is set to begin harvesting.
Ghana Deliveries Surge
Evidence of increased supply is already emerging. In Ghana, the second-largest producer, cocoa arrivals at ports reached 50,440 metric tons (MT) in the four weeks ending September 4. This is a substantial increase compared to the approximately 11,000 MT delivered during the same period in the previous year.
This surge in deliveries from key producers is creating a bearish sentiment in the market, as traders anticipate an abundance of cocoa beans in the coming months.
Weakening Chocolate Demand Raises Concerns
While supply is expected to rise, demand for chocolate appears to be faltering, adding further downward pressure on cocoa prices. For months, analysts have worried that persistently high cocoa prices would eventually be passed on to consumers, leading to reduced consumption.
Recent reports from major industry players confirm these fears. Swiss chocolate maker Lindt & Sprüngli AG lowered its profit margin guidance for the year, citing a larger-than-expected decline in chocolate sales during the first half of the year. Similarly, Barry Callebaut AG, a leading manufacturer of chocolate and cocoa products, reduced its sales volume guidance for the second time in three months.
Barry Callebaut projected a decline in its full-year sales volume and reported a significant -9.5% drop in sales volume for the March-May period, its largest quarterly decline in a decade.
This trend is reflected in regional data on cocoa grindings, a key indicator of demand. In the second quarter, European cocoa grindings fell by 7.2% year-over-year. The decline was even more pronounced in Asia, where grindings dropped by 16.3% to an eight-year low for the quarter. North American grindings saw a more modest decline of 2.8%.
Conflicting Factors and Market Positioning
Despite the strong bearish signals, several underlying factors could potentially limit further price declines or even trigger a reversal. One area of concern for the market is inventory levels. ICE-monitored cocoa inventories held in U.S. ports recently fell to a 5.75-month low of 1,894,850 bags, suggesting that stockpiles are tighter than previously thought.
Production and Quality Issues
Not all production news is positive. While the main crop in the Ivory Coast looks promising, there are quality concerns regarding its mid-crop, which is the smaller of the two annual harvests. According to Rabobank, late rainfall limited crop growth, impacting quality. The mid-crop is estimated to be 400,000 MT, a 9% decrease from last year's 440,000 MT.
Furthermore, Nigeria, the world's fifth-largest producer, anticipates a smaller harvest. The Cocoa Association of Nigeria projects that the country's 2025/26 production will fall by 11% year-over-year to 305,000 MT. This projection was accompanied by data showing Nigeria's July cocoa exports fell by 22% compared to the previous year.
Funds Hold Large Short Position
Market positioning could also play a significant role. According to the weekly Commitment of Traders (COT) data, hedge funds have increased their net-short positions in London cocoa to 10,771 contracts. This is the largest collective bet on falling prices in more than three years. Such an extreme position creates the risk of a "short squeeze," where a sudden price rise forces these traders to buy back contracts to cover their positions, further accelerating the rally.
ICCO Forecasts a Shift to Surplus
Looking at the broader global picture, the International Cocoa Organization (ICCO) provides critical long-term forecasts. For the recently concluded 2023/24 season, the ICCO estimated a global cocoa deficit of -494,000 MT, the largest in over 60 years. This historic shortfall was driven by a 13.1% decline in production and pushed the global stocks-to-grindings ratio to a 46-year low of 27.0%.
However, the organization anticipates a significant turnaround for the upcoming season. For 2024/25, the ICCO has forecasted a global cocoa surplus of 142,000 MT. This would mark the first surplus in four years, driven by a projected 7.8% rebound in global production to 4.84 million metric tons.
This forecast aligns with the current market sentiment, suggesting that the era of severe deficits may be ending, paving the way for a period of more balanced supply and potentially lower prices.
