Cocoa: Bottoming Out or a Pause Before Further Declines?

Cocoa prices have lingered near the $8,000 per tonne mark for an extended period. The mid-crop harvest has recently commenced, although supplies from this season will not materialize until later in the year. Currently, the market continues to receive cocoa from the main crop, which has already undergone processing like drying and fermentation.

Recent data indicates a 10.7% year-on-year increase in cocoa arrivals at Ivorian ports, reaching 1.45 million tonnes. However, this modest rebound follows a severely disappointing previous season. Furthermore, a 35% supply surplus in December suggests that subsequent harvests were less robust. Initial forecasts from the International Cocoa Organization (ICCO) had anticipated an approximate 8% global production increase for the season, reaching 4.84 million tonnes.

While cocoa production is projected to rise this season, it may fall short of the ICCO's initial optimistic outlook. Source: Bloomberg Finance LP, XTB

Demand-side dynamics also warrant attention. Severely depleted inventories suggested an end to the availability of cheaper supplies acquired before the significant price surge of recent years. While some demand destruction is evident, primarily through adjustments in cocoa content within products, it remains relatively limited. First-quarter processing data for Europe showed a 3.7% year-on-year decline to 353,500 tonnes, better than the anticipated 5% decrease. Similarly, Asian processing volumes reached 214,000 tonnes, a 3.4% year-on-year drop, also less severe than the expected 5% contraction.

European cocoa processing data. Source: ECA

Given the possibility of production undershooting expectations and demand proving more resilient, the anticipated supply surplus could be considerably smaller. Earlier projections suggested a balanced market, and there is a strong likelihood of revisiting this scenario soon, particularly as current cocoa prices are more palatable for processors compared to a few months ago.

The current supply surplus is estimated at 142,000 tonnes; however, based on recent information, the ICCO is likely to revise these forecasts downwards in the near term. Source: Bloomberg Finance LP, XTB

Amid slightly stronger supplies this season compared to the last, exchange inventories are showing a seasonal rebound. This is not unusual, considering historical patterns. Over the past decade, only 2024 witnessed a decline in inventories during the first two quarters. Nevertheless, a continued sharp increase in inventories through May and into early June could signal genuine demand destruction and a fundamental shift in the market. Currently, however, there is no compelling reason to deviate from viewing this as typical seasonality. It is worth noting that the mid-crop production forecast for Côte d'Ivoire anticipates 400,000 tonnes, a 10% decrease year-on-year.

Cocoa inventories are increasing in line with seasonal patterns. Typically, inventory growth concludes around the May-June transition. Source: Bloomberg Finance LP, XTB

The market remains exceptionally illiquid, evidenced by the low volume of long and short positions on the New York exchange. This year has seen a further significant reduction in positions, indicating speculator apprehension regarding potential supply disruptions. Last year, traders who sold delivery contracts to processors while simultaneously buying in the local spot market incurred substantial losses or faced bankruptcy.

Low open interest highlights the market's thin liquidity. Source: Bloomberg Finance LP, XTB

If the annual change in open interest were to serve as a leading indicator for the annual price change, we should anticipate limited price volatility in the coming months. Applying a one-to-one correlation (a significant simplification, of course), we might expect a 15-20% year-on-year price decline by July. This would place the price range at $7,400-$7,700 per tonne, very close to current levels and may be related to the backwardation (future contracts are priced lower than spot prices). However, it is crucial to remember that while this relationship has held to varying degrees over the past two years, it does not guarantee its continuation for the next two.

The lack of liquidity in the markets suggests that prices should consolidate for many months to come. The $7,000 per tonne level represents strong technical support, while $8,000 is currently a level defended by buyers. Source: Bloomberg Finance LP, XTB

Interestingly, the forward curve is now considerably flatter than a year ago, but this flattening has not solely resulted from a decline in short-dated contracts. While near-term contracts have fallen, longer-dated contracts have simultaneously risen. The September contract is trading at $7,800, while the March 2025 contract is at $7,200, and the March 2027 contract is near $7,000. This suggests a more balanced market but also indicates that elevated price levels are likely to persist.

A potential saucer-bottom formation is beginning to emerge on the chart within the $7,700-$8,000 per tonne range. Should the mid-season harvest prove genuinely disappointing, the price could attempt to reach the recent local high above $9,000 per tonne. Strong resistance, associated with the June 2024 peak and the December 2024 low, is located at $10,000 per tonne. Source: xStation5