Kleos Advisory: Cocoa market cannot sustain recent highs

The cocoa market is currently experiencing a price slump due to high farmgate prices and illiquid trading volumes, according to Tedd George, the Chief Narrative Officer at Kleos Advisory. In a recent interview with CNBC Africa, George highlighted that the market cannot sustain the highs it reached earlier this year, with prices dropping from around $10,000 per tonne to the current range of $6,000 to $7,000. While this represents a significant decline, it is still three times higher than prices in the period from 2019 to 2022, indicating the volatility of the market. George pointed out that low trading volumes and a lack of liquidity in the market could be giving false signals regarding price movements. Long positions are at a three-year low, while short positions are at a seven-year low, contributing to the uncertainty in the market. Additionally, increased farmgate prices in Ghana and Cote d'Ivoire have led to more beans entering the market, but challenges remain in terms of output volumes and supply dynamics. Ghana is facing its third successive season of poor crop yields, with production expected to reach a 22-year low of 425,000 tons. Cote d'Ivoire is also experiencing lower yields, with the mid-crop forecasted to be down by at least 100,000 tons, leading to an eight-year low in production. These factors have created a global shortage of at least half a million tons, driving prices higher despite recent fluctuations. Looking ahead, George highlighted the volatility in the market and expressed concerns about the mortgage of next season's harvest, which could impact future bean availability. The International Cocoa Organization expects the deficit to widen to 374,000 tons by the end of 2024, underscoring the ongoing challenges in the industry. At the recent World Cocoa Conference in Brussels, key discussions focused on the need for a living income for cocoa farmers, the role of women in the supply chain, and the importance of sustainability. Participants emphasized the critical role of cocoa farmers in the industry and the necessity of supporting and protecting them for the long-term sustainability of cocoa production. As the rainy season begins in West Africa, concerns are rising about the impact of heavy rainfall on crop yields, particularly in Nigeria. While there is potential for a bounce back in export volumes, the overall outlook for cocoa production in the region remains uncertain, with expectations of underperformance compared to previous seasons. The market will continue to monitor developments within the cocoa industry to navigate through the current crisis.