Cocoa Prices Under Pressure Amid Soaring Global Deficit

Cocoa prices face downward pressure. The analysis highlights that cocoa futures are declining due to increased moisture levels in West Africa, but supply concerns may support prices despite demand dips.

Date: 01-02-2025

AI Rating: 5

Earnings Potential Impacted by Cocoa Price Variability
Current cocoa market conditions indicate fluctuations that can materially affect earnings for companies reliant on cocoa ingredients. Cocoa prices are under pressure as recent rain in West Africa has improved soil moisture and reduced the previously dry conditions, leading to long liquidation in cocoa futures. The NY cocoa has reached a two-week low while London cocoa hit a one-month low, suggesting a bearish trend in short-term pricing.

Crop Production Concerns
Despite a recent widening of the cocoa deficit, there are conflicting indicators regarding crop production. The forecaster Maxar Technologies highlighted the driest Harmattan winds in six years, adversely affecting crop conditions, particularly in Ivory Coast and Ghana. Reports of yellowing leaves and withering cocoa pods signal potential long-term production issues which may eventually support cocoa prices.

Global Supply Tightening
The International Cocoa Organization (ICCO) has adjusted its cocoa deficit estimate to -478,000 MT, the largest deficit in over 60 years. It also revised cocoa production estimates down to 4.380 MMT, reflecting an alarming decline of -13.1% year-on-year. This scenario may exert upward pressure on cocoa prices despite concerns of weakening demand.

Inventory Analysis
Cocoa inventories in U.S. ports have declined significantly, reaching a 21-year low last week. Reduced supply suggests potential upward pricing adjustments, however, this may not be enough to offset the reductions seen in grindings across Europe and Asia. Notably, Q4 2023 grindings in Europe fell by -5.3%, signaling demand destruction that price levels are currently inducing.

Market Sentiment About Cocoa Demand
The overall sentiment regarding cocoa demand remains cautious. In light of rising prices, cocoa grindings in North America and Asia are showing declines. Should this pattern continue, it could indicate broader issues for manufacturers and companies that rely heavily on cocoa, such as Hershey Co., which aims to purchase a substantial amount of cocoa to hedge against the tight supply.

Conclusion
Overall, the cocoa market faces a complex interplay of declining supply, fluctuating production estimates, and weakening demand, all of which are critical for investors to monitor as they decide on future investments in related equities.

Stocks: HSY