Citi on what’s next for cocoa and coffee prices after a record rally

Citi says a record-breaking rally for cocoa and coffee prices could yet have further room to run, citing adverse weather conditions and demand expectations.

In New York, benchmark ICE cocoa futures traded 1.6% lower at $9,370 per metric ton on Thursday. The contract, which recently surpassed the $10,000 threshold for the first time, has surged more than 120% so far this year.

Citi expects cocoa trading to stabilize in a range between $9,000 to $10,000 per metric ton over the next three to four weeks.

Beyond that, analysts at the Wall Street bank said in a research note out on Wednesday that it sees “two-way financial market risks” in the second half the year — and that the May to June period “could represent a turning point in the cocoa bull cycle.”

Citi said cocoa grindings, which result from bean processing and are a measure of demand, will be one key factor likely to determine whether prices have any further upside.

Citi said a significant contraction in first-quarter grindings data and a drop in origin processing might suffice for New York and London cocoa markets to unwind by up to 25% to the $7,000 to $7,500 range.

“But if cocoa grindings only marginally subside (as was the case in 4Q’23) and industry statements imply limited consumer pushback, then traders could quickly target $11,000-12,000/t,” analysts at the bank said.

Overall, Citi says it remains “mildly bearish” on cocoa prices through to year-end and more so in the 2025 calendar year.

Difficult weather conditions and disease have affected production in West Africa, which supplies about 70% of the world’s cocoa. The two largest producers, Ivory Coast and Ghana, were recently hit by a combination of heavy rain, dry heat and disease.

El Niño-related dryness in much of Southeast Asia, India, Australia and parts of Africa has supported a price rally for soft commodities such as sugar, coffee and cocoa in recent months, the Netherlands-based Rabobank said in its annual outlook for 2024.

The El Niño phenomenon, which returned last year, is a naturally occurring climate pattern that takes place when sea temperatures in the eastern Pacific rise 0.5 degrees Celsius above the long-term average. It can pave the way to more storms and droughts.

Arabica coffee futures with May delivery climbed above the key barrier of $2 per pound on Wednesday, notching a new high for the year. The contract was last seen trading 1.8% higher at $2.07 on Thursday.

“The current move can largely be attributed to a heat wave in Vietnam affecting Robusta coffee production and as a result, providing carryover support for premium Arabica beans,” Aakash Doshi, senior commodities strategist at Citi, said in a research note published Thursday.

Citi said recent price action had exceeded its short-term target of $1.85 and the team was now poised for a near-term rally up to between $2.1 and $2.2 on the back of adverse weather conditions and further financial inflows, among other market signals.

The bank said that it expects Arabica coffee futures to trade in a range between $1.88 to $2.15 through the 2024 calendar year, adding that it is poised increase its projections further if the physical outlook tightens.

— CNBC’s Michael Bloom, Spencer Kimball & Fred Imbert contributed to this report.