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Cocoa Prices Plunge as Rally Fizzles, Liquidity Dries Up

Cocoa prices have experienced a dramatic downturn, with a nearly 29% drop over the past week, as buyers retreat from the market amidst historically high prices and dwindling liquidity, according to a report by the Wall Street Journal.

"After a monthslong rally in crop prices, which sent prices up almost 80% since the start of the year, this week’s sudden, rapid slump reflects reduced liquidity in the cocoa market," the Wall Street Journal reports. "This means even small volumes of trades can aggressively affect prices, as traders grow increasingly reluctant to buy in."

New York cocoa futures dipped to as low as $6,990 per metric ton on Friday.

The surge in cocoa prices earlier this year was driven by concerns over supply shortages stemming from poor harvests in West Africa, the source of roughly 70% of global cocoa production. Adverse weather conditions and disease outbreaks in Ivory Coast and Ghana, the region's leading producers, contributed to the tight supply situation.

However, recent rains in West Africa have improved the outlook for the mid-season crop, and the lack of market liquidity has amplified the impact of any news, whether positive or negative, on cocoa prices.

Despite the recent price drop, demand for cocoa remains strong. European cocoa grindings, a key indicator of demand, fell by only 2.2% in the first quarter, suggesting continued robust consumption in one of the world's largest cocoa markets.

Analysts anticipate that average cocoa prices in 2024 and 2025 will remain above historical norms, although further price volatility is expected in the coming months. The transition to La Niña weather conditions, with its potential for both increased rainfall and crop damage, adds another layer of uncertainty to the cocoa market outlook.