Cocoa Prices Sink as Dollar Strength Sparks Long Liquidation

Cocoa - cacao-bean-2522918_1920

July ICE NY cocoa (CCN24) today is down -527 (-4.88%), and July ICE London cocoa #7 (CAN24) is down -218 (-2.41%).

Cocoa prices today are sharply lower.  Long liquidation emerged in cocoa futures today after the dollar index (DXY00) rallied to a 5-week high.  Also, heightened political turmoil in France has led to a risk-off mood in asset markets today and is weighing on cocoa prices.  Losses in London cocoa were limited after the British pound (^GBPUSD) fell to a 4-week low, which boosts cocoa that is priced in terms of sterling.

On Thursday, cocoa prices rallied to 1-1/2 month highs on concerns that the global cocoa shortage will persist.  Reuters reported Wednesday that Ghana is considering delaying the delivery of up to 350,000 MT of cocoa beans to next season due to the country's poor crops.  Ghana is the world's second-largest cocoa producer.

Cocoa also has support from concern that Ivory Coast mid-crop cocoa sales restrictions will further tighten global supplies.  Last  Friday, the Ivory Coast cocoa regulator, Le Conseil du Cafe-Cacao, told companies and exporters that don't have processing plants in the Ivory Coast that they can't buy cocoa beans from the Ivory Coast mid-crop until at least the end of this month.

Lower cocoa production in the Ivory Coast, the world's largest producer, is a bullish price factor.  Government data Monday showed that Ivory Coast farmers shipped 1.53 MMT of cocoa to ports from October 1 to June 9, down by 29% from the same time last year.  Trader Ecom Agroindustrial projects Ivory Coast 2023/24 cocoa production, which ends in September, will fall -21.5% y/y to an 8-year low of 1.75 MMT.  

Cocoa prices also have carryover support from May 31, when the ICCO estimated a 439,000 MT cocoa deficit for 2023/24, 17% higher than its February estimate of 374,000 MT and nearly six times larger than the 74,000 MT deficit in 2022/23.  ICCO said, "Current available data reveal that cocoa grinding activities have so far been unrelenting in importing countries despite the record cocoa price rallies.  As the 2023-24 season progresses, it is certain the season will end in a higher deficit than previously expected."  ICCO raised its 2023-24 grindings estimate to 4.855 MMT from 4.779 MMT, representing a -4.3% y/y fall from 2022/23.  ICOO raised its production projection from February by 12,000 MT to 4.461 MMT, representing a -11.7% y/y decline from 2022/23.  In addition, ICCO projects a 2023/24 global cocoa stocks/grindings ratio of a 46-year low of 27.4%.

Another bullish factor for cocoa is dwindling inventories, as ICE-monitored cocoa inventories held in US ports fell to a 3-1/4 year low of 3,442,973 bags Thursday.

Cocoa also has support from signs that global cocoa demand remains resilient despite record-high prices.  On April 18, the National Confectioners Association reported that North American Q1 cocoa grindings rose +9.3% q/q and +3.7 % y/y to 113,683 MT.  Also, on April 18, the Cocoa Association of Asia reported that Q1 Asia cocoa grindings rose +5.1% q/q, although they fell -0.2% y/y to 221,530 MT.  In addition, the European Cocoa Association reported that Q1 European cocoa grindings rose +4.7% q/q, although they fell -2.2% y/y to 367,287 MT.

Ghana's Cocoa Board (Cocobod) said on March 25 that Ghana's 2023/24 cocoa harvest would be only 422,500 MMT to 425,000 MT, half the country's initial forecast and a 22-year low, as extreme weather and disease decimated the cocoa crop.

Concerns about the West African mid-crop, the smaller of two annual harvests, are leading to tightness in cocoa supplies.  Projections for the Ghana mid-crop, which starts in July, have been cut to 25,000 MT compared with an earlier forecast of 150,000 MT.  Also, the Ivory Coast cocoa regulator said on March 7 that it expects the Ivory Coast mid-crop, which officially starts in April, to fall -33% to 400,000 MT from 600,000 MT last year.  In addition, projections for Nigeria's mid-crop have been reduced to 76,500 MT from an earlier estimate of 90,000 MT.

Over the past year, unfavorable growing conditions and crop disease on West African farms have curbed cocoa production.  A global cocoa deficit is expected to extend into 2023/24 since current production is insufficient to meet demand.  Also, cocoa prices are seeing support from the current El Nino weather event after an El Nino event in 2016 caused a drought that fueled a rally in cocoa prices to a 12-year high.

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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.