Risk Off Sentiment in Commodities Weighs on Cocoa Prices

Dec ICE NY cocoa (CCZ23) on Wednesday closed -72 (-1.98%), and Dec ICE London cocoa #7 (CAZ23) closed -66 (-2.16%).

Cocoa prices Wednesday closed sharply lower, with NY cocoa falling to a 3-week low and London cocoa dropping to a 1-1/2 week low.  Concerns that the Fed would signal higher interest rates for longer at Wednesday's FOMC meeting sparked a risk-off mood across the commodity markets.

An excessive long position of NY cocoa futures by funds could fuel long liquidation pressures after last Friday's weekly Commitment of Traders report showed funds increased their net long NY cocoa positions by 1,668 in the week ended September 12 to 78,982, a 9-year high.  

ICE-monitored cocoa inventories held in U.S. ports have steadily declined over the past three months to a 6-1/2 month low Tuesday.  

Cocoa prices have trended higher over the past year, with nearest-futures (U23) NY cocoa climbing to a 44-year high last Wednesday and London cocoa posting a record high last Friday on concerns about global cocoa production.  Due to recent heavy rain in West Africa, black pod disease has spread.  The spread of the disease, which causes cocoa pods to turn black and rot, could result in lower cocoa crop quality and production and push the global cocoa market into a third year of deficit for the 2023/24 season.

Also, the spread of the swollen shoot virus is threatening Ivory Coast cocoa crops.  The virus is transmitted via mealybugs that feed on the sap of cocoa plants and will significantly reduce cocoa crop yields before eventually killing the plant.  Tropical Research Services estimates that about 20% of the cocoa crop in the Ivory Coast is infected with the swollen shoot virus.

Smaller cocoa supplies from the Ivory Coast are bullish for prices.  Ivory Coast farmers shipped 2.36 MMT of cocoa from Oct 1-Sep 17, down -3.3% y/y.  The Ivory Coast is the world's largest cocoa producer.    

Concern about lower cocoa production in Ghana, the world's second-largest producer, is a positive development for cocoa prices.  Ghana's cocoa regulator said on August 16 that its cocoa farmers would be unlikely to fulfill some of its cocoa contracts for a second season.  Ghana's regulator postponed 44,000 MT of cocoa shipments to future seasons due to a lack of supplies.  Ghana's 2022/23 cocoa crop is now expected at around 650,000 MT, a 13-year low and 24% below initial estimates of 850,000 MT, as a lack of fertilizers and black pod disease hurt cocoa yields.  

Cocoa supplies have shrunk as 2023/24 Ivory Coast forward cocoa sales from Oct 1-July 7 fell -1.3 MMT (-13.3%) y/y, and the Ivory Coast cocoa regulator, Le Conseil Cafe Cacao, said on July 18 that the Ivory Coast is not making further forward sales of cocoa for export in the 2023/24 season.  Meanwhile, July cocoa exports from Nigeria, the world's fifth-largest cocoa bean producer, fell -14% y/y to 13,317 tons.  

Cocoa prices have support from concern that an El Nino weather event could undercut global cocoa production.  On June 8, the U.S. Climate Prediction Center said that sea surface temperatures across the equatorial Pacific Ocean had risen 0.5 degrees Celsius above normal, and wind patterns have changed to the point where El Nino criteria have been met.  Cocoa prices rallied to 12-year highs in 2016 after an El Nino weather event caused a drought that hampered global cocoa production.

The recent surge in cocoa prices is beginning to curb demand.  The National Confectioners Association on July 20 reported that North American Q2 cocoa processing fell -12% y/y to 102,493 MT, the lowest for a Q2 in 15 years.  Also, the Cocoa Association of Asia reported that Asia Q2 cocoa grindings fell -6.5% y/y to 213,977 MT.   In addition, the European Cocoa Association on July 6 reported that European Q2 cocoa processing fell -5.7% y/y to a 2-year low of 343,283 MT.  Finally, Barry Callebaut, the world's biggest chocolate maker, reported that its sales volume fell -2.7% in the first nine months of the fiscal year ending May 31 as higher prices hurt sales.  On the stronger side, Gepex, an exporter group that includes six of the world's biggest cocoa grinders, reported on August 11 that its Q2 cocoa processing rose +3% y/y to 161,433 MT.  

The International Cocoa Organization (ICCO) forecasts global 2022/23 cocoa production to increase +2.4% y/y to 4.938 MMT and global cocoa grindings to increase +0.2% y/y to 5.005 MMT.  The ICCO estimates the total end of season 2022/23 global cocoa stocks of 1.707 MMT and the cocoa stocks-to-grinding ratio to fall to a 7-year low of 34.5%.  The ICCO projected a global cocoa deficit for 2022/23 of -146,000 tons and said, "The expectation of a supply deficit has been compounded with weather variations, especially in West Africa." 

More Cocoa News from Barchart

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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