The Impact of Adverse Weather and Demand Expectations on Cocoa and Coffee Prices

The Impact of Adverse Weather and Demand Expectations on Cocoa and Coffee Prices

The surge in cocoa and coffee prices has been unprecedented, with benchmark ICE cocoa futures surpassing the $10,000 threshold for the first time. The prices have surged more than 120% so far this year, driven by adverse weather conditions and demand expectations. Citi predicts that cocoa trading will stabilize in a range between $9,000 to $10,000 per metric ton over the next few weeks.

Financial Market Risks and Cocoa Bull Cycle

Analysts at Citi have raised concerns about potential two-way financial market risks in the second half of the year, suggesting that the May to June period could represent a turning point in the cocoa bull cycle. The key factor likely to determine further price movements is cocoa grindings, which are a measure of demand. A significant contraction in first-quarter grindings data could lead to a significant price decline, while limited consumer pushback could drive prices even higher to $11,000-12,000 per metric ton.

Difficult weather conditions and disease have impacted cocoa production in West Africa, which supplies about 70% of the world’s cocoa. Heavy rain, dry heat, and disease have affected production in Ivory Coast and Ghana, the two largest producers of cocoa. El Niño-related dryness in Southeast Asia, India, Australia, and parts of Africa has also contributed to the price rally for soft commodities like sugar, coffee, and cocoa.

In addition to cocoa, coffee prices have also been on the rise. Arabica coffee futures reached a new high for the year, climbing above $2 per pound. A heat wave in Vietnam has affected Robusta coffee production, providing support for premium Arabica beans. Citi expects coffee prices to continue rallying in the short and medium term, with futures trading in a range between $1.88 to $2.15 through the 2024 calendar year.

Despite the current rally in cocoa and coffee prices, Citi remains “mildly bearish” on cocoa prices through the year-end and more so in the 2025 calendar year. The bank is poised to increase its projections further if the physical outlook tightens and adverse weather conditions persist. Overall, the outlook for cocoa and coffee prices remains uncertain, with a range of factors influencing future price movements.

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