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Cocoa Prices Drop Amid Rain Forecasts and Supply Concerns

Cocoa prices are under pressure from favorable rain forecasts and increasing inventories, signaling potential price declines. Key players like Hershey and Mondelez report sales drops, indicating consumer demand may wane due to tariff impacts. Investors should monitor these trends closely.

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AI Rating:   5

Market Overview: The recent report highlights a downward trend in cocoa prices, closing lower on both ICE NY and ICE London markets. The current situation is influenced by favorable rainfall in West Africa, which could enhance crop yields, thus adding bearish pressure to prices.

Weather Conditions: Expected rain in cocoa-growing regions is forecasted to aid crop development. This is a bearish signal as it suggests a potential increase in supply, which can further depress prices. Despite some drought concerns, the overall weather situation indicated by meteorologists appears to favor crop growth.

Inventories and Exports: Rebounding cocoa inventories in U.S. ports are bearish, having increased significantly from a 21-year low earlier in the year. Exports from Ivory Coast are slower, providing some level of support for prices. However, the reported 9.6% increase in year-to-date exports compared to the previous year is less impressive relative to past performance.

Quality Concerns: There are ongoing quality issues with the mid-crop cocoa being harvested in the Ivory Coast. Reports from cocoa processors indicate that 5-6% of truckloads are of poor quality—significantly higher than the 1% during the main crop. This quality concern may limit the effective supply reaching the market, providing mixed signals for pricing.

Demand Outlook: Major chocolate manufacturers are experiencing demand challenges. Reports indicate a significant drop in Q1 sales for Hershey, along with guidance cuts from Barry Callebaut AG due to high cocoa prices and tariff-related uncertainties. This suggests that consumers may reduce consumption as prices rise, which can further impact cocoa prices negatively.

Grind Data and Future Projections: Although there have been slight declines in global cocoa grindings across major markets (North America, Europe, and Asia), the drops were not as severe as expected, indicating some resilience in demand. The ICCO's forecast of a global cocoa surplus in the upcoming years may indicate recovery in production, offering a slightly optimistic outlook for future supply and balanced pricing.

Stocks:  HSY MDLZ