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Cocoa Prices Rally Amid Quality Concerns and Trade War

Cocoa prices show a bullish trend with NY cocoa at a 1-1/2 week high, driven by concerns over the quality of the Ivory Coast's mid-crop. However, rising tariffs and demand uncertainties may limit further price gains.

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AI Rating:   5
Supply Issues and Pricing Trends
Recent reports indicate that cocoa prices are on the rise, with New York cocoa achieving a 1-1/2 week high and London cocoa reaching a 5-week high. The driving force behind this increase appears to be quality issues pertaining to the mid-crop from the Ivory Coast, as processors report rejecting 5-6% of cocoa due to poor quality—compared to just 1% during the main crop. This raises concerns about supply, which could elevate prices further.

According to estimates, the mid-crop harvest is projected to decline by 9% year-on-year to 400,000 MT. This is relevant from an investor's perspective, as a scarcity in supply could drive up cocoa prices, benefiting companies involved in cocoa production and processing. However, other factors including global demand and tariff impacts are also critical.

Global Demand and Producer Challenges
Positive long-term trends in cocoa demand allow for a nuanced perspective. Data indicated that Q1 grindings in North America and Europe underperformed but not as badly as analysts anticipated, which may suggest persistent consumer interest. Notably, Hershey Co. reported a significant 14% drop in Q1 sales, attributing part of it to rising cocoa costs affected by tariffs. This could hamper future revenue growth for companies like Hershey and Mondelez International; the latter also reported weaker-than-expected sales, indicating potential risks for the chocolate sector.

While the ICCO forecasts a global cocoa surplus for 2024/25, the ongoing cocoa deficit of 441,000 MT for 2023/24 and record low global stocks/grindings ratio signal mixed prospects. Growing inventories in the U.S. may counterbalance positive price trends, contributing to a bearish outlook in the medium term.

Conclusion
From an investment standpoint, companies operating within the cocoa space should brace for volatility, impacted by quality concerns and global demand fluctuations. The prospect of rising tariffs could further stifle consumer demand, negating short-term gains in cocoa prices. Investors should closely monitor these developments, especially in light of the challenging competitive landscape in the chocolate market.
Stocks:  HSY MDLZ