On Monday, cocoa prices made moderate gains, with September futures for NY cocoa rising by 0.21% (+7), marking a one-week high, while September futures for ICE London cocoa #7 also saw an increase of 0.74% (+16).
These gains have been driven in part by reduced cocoa supplies from the Ivory Coast, the world’s largest cocoa producer, with 2.29 million metric tonnes (MMT) shipped between October 1 and July 16, marking a decrease of 2.6% year-on-year (y/y). This, coupled with the recent announcement of a 13.3% (1.3 MMT) y/y drop in forward sales for the 2023/24 season, suggests a potentially tighter future for cocoa supplies, which has bolstered prices.
However, this was offset by indications of waning demand for cocoa, which spurred the liquidation of cocoa futures last Thursday. The European Cocoa Association reported a decrease in Q2 European cocoa processing of 8.5% quarter-on-quarter (q/q) and 5.7% y/y, equating to a two-year low of 343,283 metric tonnes (MT). Further contributing to the market dip was news that Barry Callebaut, the world’s largest chocolate maker, had seen a drop in sales volume of 2.7% in the nine months leading up to May 31 due to heightened prices.
Despite these fluctuations, cocoa prices overall have been on an upward trajectory recently, with September NY cocoa and September London cocoa futures reaching contract highs earlier this month, while the nearest-futures contracts for both also achieved notable highs. This has largely been spurred by heavy rainfall in West Africa, which has accelerated the spread of black pod disease – a fungal disease that causes cocoa pods to rot, thus potentially leading to a reduction in crop quality and yield.
Additional support for cocoa prices has stemmed from concerns that the El Nino weather event could have a detrimental effect on global cocoa production. The U.S. Climate Prediction Center highlighted on June 8 that sea surface temperatures across the equatorial Pacific Ocean had risen by 0.5 degrees Celsius above normal, thus meeting the criteria for an El Nino event. This weather phenomenon has been known to trigger droughts, as evidenced in 2016 when a global cocoa production shortfall led to cocoa prices soaring to 12-year highs.
In contrast, an increase in cocoa stockpiles in London could potentially apply downward pressure on prices. Certified cocoa supplies held in European port warehouses overseen by the ICE Futures Europe exchange grew by 2,920 MT last Wednesday to a record 173,780 MT. Additionally, news of a 65% y/y increase in Nigerian cocoa exports in May, amounting to 20,675 tonnes, may also bear negatively on cocoa prices. Nigeria currently ranks as the world’s fifth-largest cocoa bean producer.
The global economy’s recovery from the pandemic has reinvigorated chocolate demand, with Nielsen data showing a 10% sales increase from the previous year in the 52 weeks leading up to May 27. Researcher Euromonitor also predicts that global chocolate confectionery sales will rise by 5.8% this year, reaching nearly $26 billion.
In light of these developments, the International Cocoa Organization (ICCO) is forecasting a global cocoa deficit of 146,000 tonnes for the 2022/23 season. They stated that this expectation of a supply shortfall has been compounded by recent weather variations, particularly in West Africa. The Ivory Coast has ceased selling contracts for the 2023-24 cocoa export season due to recent heavy rainfalls causing widespread flooding on farms. This move is likely to affect key buyers, including major commodities trading houses such as Cargill and Olam, as well as chocolate manufacturers like Barry Callebaut, Hershey, and Nestle.
Given current record levels for cocoa prices and concerns about supply, the suspension of sales will be a significant setback for the Ivory Coast, which depends on cocoa for 40% of its export earnings, according to the United Nations. Cocoa production for the main harvest season, commencing in October, is anticipated to significantly decline, causing concern for both farmers and buyers alike.
Image Credit: Pablo Merchán Montes on Unsplash
