Cocoa prices have experienced a sharp decline from their recent highs, signaling a shift towards market surplus. Despite this, ongoing supply risks and low stock levels continue to fuel market volatility.
Continued Market Volatility Amid Lower Participation
The first quarter of 2024 has seen significant volatility in cocoa prices. London cocoa futures have fluctuated within a GBP3,400/ton range, and implied volatility remains elevated above pre-2024 levels, though lower than the peak experienced in 2024. The market is currently at its lowest point since November 2023, reversing cocoa’s position as the best-performing commodity of 2024 to the second-worst performer this year.
The prospect of a modest surplus in the 2024/25 season has alleviated some supply concerns, but with global inventories still constrained after three consecutive years of deficits, cocoa prices are expected to remain volatile. While these risks persist, if they do not materialize, prices are likely to continue trending downward.
Market Dynamics and Positioning Shifts
Spreads between futures contracts suggest reduced concerns about market tightness. The front end of the London cocoa futures curve has flattened and even moved into a small contango. This shift is likely a result of speculative investors liquidating positions in the shorter-term contracts, putting downward pressure on nearby spreads.
Investor positioning in the London cocoa market has also shifted significantly. Managed money’s net long position has halved since the start of the year, from nearly 32,000 lots in January to under 13,000 lots today. However, market volatility has been compounded by declining open interest and traded volumes. While daily traded volumes have held relatively steady, the average daily volume-to-open interest ratio has increased since 2024, indicating heightened volatility.
Reduced market participation can be attributed to the reluctance of physical longs to hedge their positions due to the recent market strength. Selling futures in a rising market can lead to liquidity issues and larger margin calls for market participants. Moreover, ongoing uncertainty around supply has made physical longs hesitant to sell futures for fear of needing to repurchase them later.
Supply Outlook: Improved but Uncertain
Despite the improvements in supply prospects, cocoa markets remain sensitive to weather patterns and crop developments, particularly in West Africa. Dry harmattan winds have raised concerns about the mid-crop, following heavy rainfall in late 2023 that contributed to the spread of fungal diseases like brown rot.
In the Ivory Coast, cocoa arrivals are up 14% year-on-year at 1.4 million tons, although the year-on-year gap has narrowed since the start of the season. The mid-crop in the Ivory Coast, which begins in April, is expected to be around 300,000 tons—well below the historical average of 500,000 tons. Nevertheless, total output in the Ivory Coast for the 2024/25 season is forecast to grow by just under 11% year-on-year, reaching 1.85 million tons, though still below the 2.2 million tons produced in the 2022/23 season.
Other major cocoa producers, Ghana and Ecuador, are expected to see increases in supply, with forecasts showing growth of approximately 13% and 12%, respectively. The International Cocoa Organization (ICCO) estimates global output will rise by 8% year-on-year to 4.84 million tons.
Impact of High Prices on Demand
Higher cocoa prices, while challenging for consumers, serve to rebalance the market by curbing demand. Quarterly grinding data reveals a 3.2% year-on-year decline in grindings across Europe, North America, and Asia in the fourth quarter of 2024. This marks the lowest level since the second quarter of 2020, driven primarily by a 5.4% drop in European grindings. Despite weaker grindings in the latter half of 2024, full-year grindings were only down 0.7% year-on-year, reflecting the delayed impact of higher prices on consumers.
The ICCO forecasts that grindings in the 2024/25 season will decline by 5% year-on-year to 4.65 million tons.
Market Shifts Towards Surplus, But Risks Persist
The global cocoa market is expected to shift to a surplus of 142,000 tons in the 2024/25 season. However, this forecast carries uncertainty, particularly regarding the mid-crop. The ICCO anticipates a 5% contraction in demand, but there is always a risk that demand could prove more resilient than expected.
Cocoa stocks began the 2024/25 season at their lowest level since the 1980s, following three years of deficit that caused stock levels to fall by more than 700,000 tons. While a surplus is projected for this season, it is relatively small, and stocks remain tight. At the end of the 2024/25 season, stocks are expected to total 1.48 million tons, maintaining a low stocks-to-grinding ratio of 31.8%, the second-lowest level since the 1980s.
In conclusion, while cocoa prices have fallen, the market remains highly sensitive to supply-side developments. Tight inventories, weather concerns, and fluctuating demand suggest that volatility will likely persist in the near term.
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