Cocoa prices experienced a further rally last week, due to growing concerns about the potential impact of an El Nino weather event on global cocoa production.

Last Friday, cocoa prices reached their highest level in a month for nearest-futures contracts, building on the gains observed on Thursday due to worries about the El Nino weather event. It is worth noting that cocoa prices soared to a 12-year high in 2016 when a previous El Nino event caused a drought that severely affected global cocoa production.

This is particularly significant as the Ivory Coast, the world’s leading cocoa producer, is already facing a decline in supply.

The U.S. Climate Prediction Centre announced last Thursday that sea surface temperatures in the equatorial Pacific Ocean were 0.5 degrees celsius higher than usual, and wind patterns indicated the presence of El Nino conditions. In the previous month, the Climate Centre raised the likelihood of an El Nino weather pattern occurring between August and October to 94 percent, up from 74 percent in April.

Reduced supply from the Ivory Coast is another factor supporting cocoa prices, as reported by Barchart – a platform that monitors the Cocoa Futures Market. In the first two weeks of May, the Ivory Coast government disclosed that farmers had delivered a total of 2.09 million metric tonnes (MMT) of cocoa to the country’s ports during the 2022/23 marketing year, representing a 3.0 percent year-on-year decline.

According to a statement from the Ivory Coast agriculture minister on March 31, the mid-crop – which is the smaller of the country’s two annual harvests and began on April 1 – is expected to decrease by 25 percent compared to the previous year, reaching 450,000 metric tonnes (MT).

Quality concerns about the Ivory Coast mid-crop led to a rally in cocoa prices last month, with prices reaching their highest level in 6-3/4 years. Barchart commented that farmers had reported poor cocoa quality, with an average bean count of 120 per 100 grammes. Exporters generally prefer a count ranging from 80 to 100 per 100 grammes, with lower bean counts indicating better cocoa quality.

The decrease in cocoa supplies from Nigeria has also contributed to the price hikes. The Cocoa Association of Nigeria reported on May 24 that the country’s cocoa exports in April declined by 46 percent compared to the previous month – and 20.6 percent compared to the previous year, amounting to 9,924 metric tonnes (MT). Nigeria ranks as the world’s fifth-largest cocoa bean producer.

Cocoa prices have received additional support from projections made by the International Cocoa Organisation (ICCO) last month. The ICCO predicted that global cocoa stockpiles for the 2022/23 period would decrease by 3.5 percent year-on-year to 1.653 MMT. The organisation also highlighted the impact of weather variations, particularly in West Africa, which have compounded the expectation of a supply deficit. On the other hand, the ICCO forecasted that global cocoa production for 2022/23 would increase by 4.1 percent year-on-year to 5.017 MMT, while global cocoa grindings would decline by 0.6 percent year-on-year to 5.027 MMT.

The quarterly report released by the ICCO on December 1 provided a bullish outlook for cocoa prices. The report indicated that global cocoa production for the 2021/22 period had declined by 8.0 percent year-on-year to 4.823 MMT due to unfavourable weather conditions and diseases affecting cocoa yields.

Furthermore, the ICCO revised its previous estimate for global cocoa production downward by 419,000mt since September. The organisation also raised the projected global cocoa deficit for the 2021/22 period to 306,000mt, up from the September forecast of 230,000mt. In the previous season, global cocoa production reached a record high of 5.242 MMT, resulting in a surplus of 209,000mt in the global cocoa market.

Nevertheless, an increase in cocoa inventories is negatively impacting prices. Monitored cocoa inventories held in U.S. port warehouses reached an 8-year-3/4 month high of 5,730,012 bags on May 22. Similarly, cocoa inventories held in European port warehouses reached an 8-3/4 month high of 147,440mt on May 15, according to ICE monitoring data.

Stronger global cocoa demand

Growing global cocoa demand is driving bullish price trends in the market. According to recent reports, there are positive indicators supporting this upward trajectory. The National Confectioners Association disclosed on April 21 that cocoa grindings in North America during Q1 rose by 2.4 percent compared to the previous month, although there was a year-on-year decline of 4.4 percent totalling 109,666 metric tonnes (MT). Similarly, the Cocoa Association of Asia reported on April 20 that Q1 cocoa grindings in Asia increased by 4.09 percent year-on-year, reaching 222,028mt.

The European Cocoa Association shared its findings on April 13, revealing that cocoa grindings in Europe during Q1 experienced a 0.5 percent year-on-year growth, amounting to 375,375mt. This figure represents the highest Q1 grindings since 1999. Additionally, a cocoa exporter group, consisting of six major cocoa grinders, reported on April 19 that its Q1 cocoa processing surged by 22 percent year-on-year, totaling 189,405mt.

Weather condition

The Pacific Ocean usually experiences normal conditions when trade winds blow westward along the equator, carrying warm water from South America to Asia. As a result, cold water rises from the depths through a process known as upwelling, replenishing the water cycle. However, this natural pattern can be disrupted by two opposing climate phenomena called El Niño and La Niña, collectively known as the El Niño-Southern Oscillation (ENSO) cycle.

These events have significant global implications, affecting weather patterns, wildfires, ecosystems and economies. Typically, El Niño and La Niña episodes persist for around nine to 12 months; but there are instances when they can persist for several years. Although El Niño and La Niña events occur on average every two to seven years, there is no set schedule for their frequency. Generally, El Niño events tend to occur more frequently than La Niña events.