Cocoa prices rose to a red-hot sizzle this Valentine’s Day — but they could soon be due for a reckoning, according to Citi. Adverse El Niño-induced weather conditions, wildfires and an onslaught of the cacao swollen shoot virus in recent months have all bottlenecked the supply of cocoa , the key commodity behind chocolate. On Monday, the commodity’s price soared to a record high, dating back to at least 1980, when it reached $6,648 per metric ton. Cocoa futures finished 25.5% higher in February, cinching their biggest monthly gain since November 2001, when they rose 31.66%. But for chocolate lovers, all hope is not lost, with Citi strategist Aakash Doshi predicting a cocoa selloff on the horizon on the back of more balanced supply. “Historically high cocoa terminal prices are warranted in the short run to better balance supply and demand (and so that the industry can eventually trade expectations of a forward surplus),” he wrote in a recent note. “However, we anticipate new-crop balances will only be in slight deficit and could balloon to a sizable surplus in 2025/26 on improved weather, increased inputs, and limited demand growth.” Cocoa supply might increase on one side of the equation, but Doshi cautioned that demand might also be weighed down by consumption risks. Wall Street analysts have touted chocolate confectioners’ high pricing powers and abilities to pass on costs to consumers, but even major manufacturers haven’t escaped unscathed. Shares of Nestle fell nearly 7% in February, marking their worst month since May 2022. Chocolate confectioner Hershey slid more than 3% in the same time, cinching its worst month since October. “A DM [developed market] recession could finally see end-consumers push back on multi-year confectionary inflation pass-through … While some processors and a few company reports do not yet indicate signs of consumption fatigue, we are cautious here,” he wrote, calling retail push-back a “material risk.” He added that with confectionary costs soaring, manufacturers could also substitute cocoa for other inputs, including cocoa powders, liquor and butter. Even against this backdrop, Doshi highlighted that it might take some time before cocoa prices completely retreat off their record highs. “Traders need to wait for 1Q consumer and origin grindings data to confirm demand destruction. Therefore, any bearish turn seems improbable prior to late April or May,” he said. “Our base case remains that cocoa terminal prices will enter a bear market by end-2024, off a historically rich nominal price area.” More specifically, Doshi expects that by year’s end or early 2025, the cocoa market can unwind between 20% to 35% from its price peak in the first half of this year. “To be sure, a higher cocoa bean ‘floor price’ at ~$3,500-4,000/t, up from ~$2,000/t, could be ‘permanent.’ But we do not see markets absorbing $7,000-10,000/t cocoa for the medium-to-long term,” he added. — CNBC’s Michael Bloom and Gina Francolla contributed to this report.
