Cocoa futures experienced a sharp ascent today, with July ICE NY cocoa (CCN25) climbing by an impressive +360 points, or +4.23%, and July ICE London cocoa #7 (CAN25) rising +72 points, or +1.14%. This significant upward movement is primarily attributed to a decline in the dollar index (DXY00), which has triggered substantial short covering across cocoa futures markets, according to market analysts.
The weakening dollar typically makes dollar-denominated commodities more attractive to holders of other currencies, often stimulating demand. In this instance, the dollar’s retreat appears to have compelled traders holding short positions in cocoa to buy back contracts to limit potential losses, a phenomenon known as short covering, thereby amplifying the price rally.
However, the current market dynamics for cocoa are characterized by a complex interplay of both bullish and bearish factors, extending beyond the immediate currency impact. While the dollar’s weakness provided an immediate catalyst, underlying supply and demand fundamentals present a more nuanced picture for the commodity’s trajectory.
Bearish Pressures and Demand Concerns
Several indicators suggest potential headwinds for cocoa prices. Reports from West Africa, specifically the Ivory Coast and Ghana – the world’s two largest cocoa producers – indicate improved weather conditions benefiting crops. Farmers in the Ivory Coast recently noted that ‘Cocoa trees continue to re-flower, and the cherelles are becoming pods,’ while Ghanaian farmers reported that recent rains have enhanced crop conditions. Such improvements typically signal a healthier supply outlook, which is bearish for prices.
Demand concerns are also weighing on the market, as evidenced by recent corporate earnings. Chocolate maker Hershey Co. reported a -14% decline in Q1 sales and anticipates $15-$20 million in tariff costs for Q2, which are expected to boost chocolate prices and further dampen consumer demand. Similarly, Mondelez International disclosed weaker-than-expected Q1 sales, attributing it to consumers curtailing snack purchases amid economic uncertainty and elevated chocolate prices.
Furthermore, a rebound in current cocoa inventories contributes to the bearish sentiment. ICE-monitored cocoa inventories held in US ports have climbed to a 7-month high of 2,084,247 bags on Monday, a significant recovery from a 21-year low of 1,263,493 bags recorded on January 24. Negative carryover also stems from a Bloomberg report indicating that Nigerian March cocoa exports surged +24% year-over-year to 27,564 MT, with Nigeria being the world’s fifth-largest cocoa producer.
Looking ahead, the International Cocoa Organization (ICCO) on February 28 forecasted a global cocoa surplus of 142,000 MT for the 2024/25 season, marking the first surplus in four years. The ICCO also projected a +7.8% year-over-year increase in global cocoa production to 4.84 MMT for the same period. Concerns about escalating global trade wars and tariffs, which could further inflate cocoa prices and reduce consumer demand, were also highlighted, with Barry Callebaut AG, a major chocolate maker, cutting its annual sales guidance on April 10 due to high cocoa prices and tariff uncertainty.
Supply Constraints and Resilient Demand
Conversely, several factors are providing underlying support to cocoa prices, potentially limiting significant downside. Quality concerns surrounding the Ivory Coast mid-crop, currently being harvested, are notable. Cocoa processors have reported rejecting truckloads of beans, citing that approximately 5% to 6% of the mid-crop cocoa in each load is of poor quality, a stark contrast to the 1% observed during the main crop.
Supply concerns were also evident when NY cocoa posted a 2-1/2 month high on April 25, driven by a slowdown in the pace of Ivory Coast cocoa exports. Government data revealed that Ivory Coast farmers shipped 1.53 MMT of cocoa to ports from October 1 to May 3 this marketing year, an increase of +11.7% from last year, but a significant deceleration from the much larger +35% increase seen in December.
Global cocoa demand, as indicated by recent grindings data, has shown resilience, offering a positive carryover. Q1 North American cocoa grindings fell -2.5% year-over-year to 110,278 MT, a better performance than expectations of at least a -5% decline. Similarly, Q1 European cocoa grindings saw a smaller-than-expected decline of -3.7% year-over-year to 353,522 MT, against expectations for a -5% drop. Asian cocoa grinding also outperformed, falling -3.4% year-over-year to 213,898 MT, better than the anticipated fall of at least -5%.
Concerns about the Ivory Coast’s upcoming mid-crop further underpin prices. According to Rabobank, late-arriving rains in the region have constrained crop growth. The average estimate for this year’s Ivory Coast mid-crop is 400,000 MT, representing a -9% decrease from last year’s 440,000 MT. Additionally, smaller cocoa supplies from Ghana are supportive, with Cocobod, Ghana’s cocoa regulator, having cut its 2024/25 harvest forecast twice to 617,500 MT, a -5% reduction from an August estimate of 650,000 MT.
Historically, the market has faced significant deficits. The ICCO reported on February 28 that the 2023/24 global cocoa deficit was a substantial -441,000 MT, marking the largest deficit in over 60 years. During this period, 2023/24 cocoa production fell -13.1% year-over-year to 4.380 MMT, resulting in a global cocoa stocks/grindings ratio of 27.0%, a 46-year low.
Today’s robust gains in cocoa futures underscore the immediate impact of macroeconomic factors like currency fluctuations on commodity markets. While a weakening dollar has provided a clear impetus for short covering and price appreciation, the broader outlook for cocoa remains a battleground between improving supply prospects in West Africa and persistent demand concerns from major chocolate manufacturers, juxtaposed against ongoing quality issues, revised crop forecasts, and a historical supply deficit that continues to influence market sentiment. Traders will closely monitor both currency movements and evolving supply-demand fundamentals to gauge the sustainability of cocoa’s current upward momentum.
