Cocoa prices are currently undergoing a rebound, seeking to recover from the significant decline witnessed on Monday. This volatility in the cocoa market has been notably amplified by a pronounced lack of liquidity, with open interest in cocoa futures hovering near levels not seen in over a decade. Last week’s release of the Commitment of Traders (COT) report provided insights into prevailing market sentiments, revealing that long-only positions in NY cocoa futures reached a four-year low, while short-only positions dropped to their lowest levels in over nine years.
The recent dip in cocoa prices can be attributed to improved weather forecasts in West Africa, a region crucial for cocoa production. Maxar Technologies reported the potential for rain showers in key cocoa-growing countries like the Ivory Coast and Ghana, which could substantially enhance cocoa growing conditions. This optimistic outlook prompted a wave of long liquidation in cocoa futures, culminating in the sharp downturn observed on Monday.
However, it’s essential to contextualize this decline within the broader dynamics of the cocoa market. Earlier this year, cocoa prices experienced an extraordinary rally, soaring to all-time highs on April 19 due to mounting supply concerns. Global cocoa grinders scrambled to secure supplies amid growing fears of default by West African cocoa suppliers on supply contracts. Reports emerged indicating negotiations between the Ghana Cocoa Board and major cocoa traders to defer the delivery of significant cocoa quantities until the next season due to a shortage of beans. This supply shortage, described as the worst in 40 years, propelled cocoa prices sharply higher.
Despite the recent correction, cocoa prices continue to find support from signs of resilient global cocoa demand. Data from the National Confectioners Association and the Cocoa Association of Asia indicate robust cocoa grindings in North America and Asia during the first quarter of the year. Additionally, the European Cocoa Association reported an uptick in cocoa grindings in Europe, albeit at a slower pace compared to the previous year.
The decline in cocoa production in the Ivory Coast, the world’s largest cocoa producer, remains a significant bullish factor for cocoa prices. Government data revealed a substantial drop in cocoa shipments from Ivorian ports compared to the previous year. Projections for the 2023/24 cocoa harvest in Ivory Coast indicate a significant decline, further exacerbating supply concerns.
Furthermore, ICE-monitored cocoa inventories held in U.S. ports have dwindled to a three-year low, underscoring the tightening supply situation. In Ghana, cocoa harvest forecasts have been slashed to half of the initial projection, reaching a 22-year low due to adverse weather conditions and crop disease.
The outlook for the West African mid-crop, a crucial period for cocoa production, remains grim. Reduced projections for the Ghana mid-crop and Ivory Coast mid-crop indicate further strain on cocoa supplies. Nigeria’s mid-crop estimates have also been revised downward, adding to supply constraints in the region.
Looking ahead, the International Cocoa Organization (ICCO) anticipates a widening global cocoa deficit in the 2023/24 season, driven by a significant drop in cocoa production coupled with declining cocoa grindings. Unfavorable weather conditions and crop disease in West Africa have severely curtailed cocoa production, exacerbating the supply shortage. The ongoing El Nino weather event further complicates the situation, reminiscent of the 2016 event that fueled a rally in cocoa prices to a 12-year high.
In response to the supply challenges, the Ivory Coast and Ghana governments have implemented measures to boost farm-gate prices for cocoa producers. While these price hikes may encourage growers to deliver more beans to the market, temporarily alleviating tight supplies, they also reflect the underlying strain on cocoa production.
Overall, cocoa prices remain sensitive to a myriad of factors, including weather conditions, demand trends, and government policies. The evolving dynamics of the cocoa market underscore the need for investors to closely monitor developments to navigate this volatile commodity landscape effectively.