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Cocoa Prices Rise Amid Surplus, Demand Concerns Persist

Cocoa prices are rebounding after hitting lows, but demand remains shaky as chocolate makers warn of high prices impacting consumption. Investors should be cautious as a global cocoa surplus looms.

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Cocoa Price Recovery and Market Dynamics
Cocoa prices have shown a temporary rebound, with May ICE NY cocoa closing up +2.00% and the London market following suit. However, the context behind this recovery is crucial for investors.

The recent surge in cocoa prices is closely tied to a weakening dollar index, which has initiated short covering in cocoa futures. Despite this uptick, broader market factors like the anticipated global cocoa surplus for 2024/25 by the International Cocoa Organization (ICCO), estimated at 142,000 MT, raise concerns about sustained price stability. Furthermore, cocoa production is forecasted to rise by +7.8% year-over-year, reaching 4.84 MMT, which combined with surplus expectations could further depress prices.

Demand and Consumption Challenges
Significant concerns about demand are exemplified by warnings from major chocolate manufacturers such as Hershey and Mondelez, indicating that elevated cocoa prices are negatively impacting consumption. Mondelez’s CFO noted a slowdown in North America, and the possibility of chocolate prices increasing by 50% further threatens demand sustainability. This sentiment is echoed by declining cocoa grinding figures, representing lower demand in Q4 for both European and Asian markets, manifesting a negative trend. The European Cocoa Association reported a -5.3% decrease year-on-year in grindings, marking the lowest levels in four years.

Supply Constraints and Other Factors
Conversely, worries about slowing exports from Ivory Coast due to reduced growth trajectory and tighter cocoa inventories could lend some support to prices. Though inventories recently reached a high after declining to a 21-year low, they had previously indicated a concerning downward trajectory.

With the ICCO also reporting a significant cocoa deficit for the 2023/24 season, the cocoa stocks/grindings ratio fell to a 46-year low. This could enhance the volatility of cocoa prices. On the other hand, decreasing supplies from Ghana also indicate supportive factors for market prices. In summary, while the cocoa market shows potential for price recovery, demand weakness and an anticipated surplus remain critical factors driving cautious investor sentiment.
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