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Cocoa Prices Decline Amid Weak Demand and Supply Concerns

Cocoa prices fell sharply this week as weak demand signals emerged from major markets. With processing declines reported in Malaysia and Brazil, professionals are watching closely as upcoming reports may reveal more about global cocoa grindings.

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Cocoa Market Overview
Cocoa prices experienced a significant drop this week, primarily driven by weak demand signals that are concerning for investors in the cocoa market. A notable decline in processing activities in major cocoa-producing countries such as Malaysia (-15.3% y/y) and Brazil (-13% y/y) highlights a negative trend that could impact cocoa-related companies in the S&P 500.

The recent drop in NY cocoa and London cocoa prices adds to a broader trend of contracting demand for cocoa and related products. Additional concerns stem from the International Cocoa Organization (ICCO)'s projections of a global cocoa surplus of 142,000 MT for the 2024/25 season, which may exacerbate the downward pressure on cocoa prices if realized.

Moreover, ongoing low consumer demand concerns were reinforced by comments from executives of major chocolate manufacturers like Hershey and Mondelez. The challenges they face as a result of high cocoa prices are likely to tighten profit margins which, in turn, could negatively affect their earnings.

Supply Chain Dynamics
The cocoa market is also reacting to global supply chain challenges, with an increasing cocoa inventory reported in U.S. ports, which is displacing price support. The fact that the cocoa inventories increased from a 21-year low indicates a recovering supply situation across the industry.

While the mid-crop forecasts from the Ivory Coast suggest a smaller yield, the potential for increased cocoa processing from countries like Nigeria continues to weigh on prices. Given that Nigeria's cocoa exports rose significantly in the past month, there may be additional downward pressure on cocoa prices as more supply hits the market.

Prospects Going Forward
Investors should be attentive to the upcoming grinding reports expected from Asia, Europe, and North America. These reports will likely provide crucial insights into demand conditions. It’s a pivotal time for cocoa markets, with the ICCO forecasting a considerable cocoa deficit for 2023/24 and a continued supply decline. However, if the trends of low processing demand persist, it may signal further complications for companies in the chocolate production and cocoa markets.

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