Cocoa market reacts to growing supply risks

The cocoa market is once again showing how quickly conditions can change. New York cocoa rose by 8% on Monday to $3,883 per tonne, mainly driven by short-covering from funds. This not only points to a technical rebound, but also to a more fundamental shift in which supply risks are gaining importance.Two weeks ago, the market was still centred around a more stabilising environment, where supply was improving due to favourable weather conditions. At the same time, demand had weakened following demand destruction after a period of record-high prices.The combination of El Niño risks, dry conditions in Ivory Coast and a shortage of fertilisers is now making the supply side more critical again. In particular, the fact that 73% of Ivorian farmers have not yet purchased fertiliser for upcoming production cycles is weighing heavily on the market.The drought in Ivory Coast is mainly affecting the later stages of the mid-crop. Farmers report that insufficient moisture is threatening pod development for July and August. As a result, beans may remain smaller and of lower quality if rains do not arrive. This keeps the market volatile: rainfall could ease prices, but continued dryness may support further recovery.Risks are also increasing outside West Africa. For Ecuador, StoneX now expects production of 590,000 to 600,000 tonnes, compared to an earlier estimate of 650,000 tonnes. This is significant, as Ecuador had been an important source of growth in a market that, after years of tightness, was in need of additional supply.Demand less weak than assumedOn the demand side, the picture is less weak than previously assumed. Improved processing data and company reports support the view that demand may recover in the second half of the year. At the same time, Barry Callebaut shows that lower cocoa prices are not automatically positive for the value chain. Margins remain under pressure, volumes are still vulnerable, and price volatility complicates planning.