According to reports, cocoa prices experienced a notable rally in recent weeks, spurred by growing concerns about the potential impact of an El Nino weather event on global cocoa production.

This surge comes on the back of cocoa prices reaching its highest level in a month for nearest-futures contracts, building on gains observed due to worries surrounding the impending El Nino phenomenon.

The market recalls the significant cocoa price hike in 2016 when a previous El Nino event caused a drought that severely affected global cocoa production.

The current rally In cocoa prices is particularly significant as the Ivory Coast, the world’s leading cocoa producer, is already grappling with a decline in supply. According to reports, reduced supply from the Ivory Coast has been a contributing factor supporting cocoa price hikes.

Meanwhile, the Ivory Coast government disclosed that during the first two weeks of May, farmers delivered a total of 2.09 million metric tonnes (MMT) of cocoa to the country’s ports, reflecting a 3.0 percent year-on-year decline.

Furthermore, projections from the Ivory Coast agriculture minister suggested that the mid-crop, which began in April, is expected to decrease by 25 percent compared to the previous year, reaching 450,000 metric tonnes (MT). These supply concerns have added to the upward pressure on cocoa prices.

El Nino Concerns and Weather Patterns

The U.S. Climate Prediction Centre has recently announced that sea surface temperatures in the equatorial Pacific Ocean are 0.5 degrees Celsius higher than usual, indicating the presence of El Nino conditions.

Additionally, wind patterns further suggest the likelihood of an El Nino weather pattern occurring between August and October. The Climate Centre’s forecast, which raised the probability of an El Nino event to 94 percent, has fueled concerns about the potential adverse effects on global cocoa production.

In addition to the challenges faced by the Ivory Coast, Ghana and Nigeria, the world’s second and fifth-largest cocoa bean producer respectively, have also contributed to the price hikes. The Cocoa Association of Nigeria reported a significant decline in cocoa exports in April, down 46 percent compared to the previous month and 20.6 percent compared to the previous year. This amounted to 9,924 metric tonnes (MT) of cocoa exports from Nigeria during April, further straining global cocoa supplies.

The International Cocoa Organisation (ICCO) has provided projections that have further bolstered the rally in cocoa prices. The ICCO predicts a 3.5 percent year-on-year decrease in global cocoa stockpiles for the 2022/23 period, totaling 1.653 million metric tonnes (MMT).

The organization also highlighted the impact of weather variations, particularly in West Africa, which have compounded expectations of a supply deficit. However, the ICCO forecasts a 4.1 percent year-on-year increase in global cocoa production for 2022/23, reaching 5.017 MMT, while global cocoa grindings are expected to decline by 0.6 percent year-on-year to 5.027 MMT.

Impact on Cocoa Inventories

Despite the upward trajectory in cocoa prices, an increase in cocoa inventories is weighing on the market. Monitored cocoa inventories held in U.S. port warehouses reached an 8-year-3/4 month high of 5,730,012 bags in May.

Similarly, cocoa inventories held in European port warehouses reached an 8-3/4 month high of 147,440 metric tonnes (MT) on May 15, according to ICE monitoring data. These higher inventories provide some level of balance to the market dynamics and temper the price rally.

Meanwhile, amidst the supply concerns and weather uncertainties, the cocoa market is experiencing stronger global demand, which is contributing to the bullish price trends.

Reports indicate positive indicators supporting this upward trajectory. For instance, cocoa grindings in North America during Q1 rose by 2.4 percent compared to the previous month, while in Asia, cocoa grindings increased by 4.09 percent year-on-year.

In Europe, cocoa grindings during Q1 experienced a 0.5 percent year-on-year growth, reaching the highest Q1 grindings since 1999. These figures from different regions suggest sustained demand for cocoa products despite the prevailing market conditions.