Cocoa Rally Driven by Supply Tightness and Index Rebalancing Momentum

Cocoa futures posted solid gains as multiple supportive factors aligned to lift prices from recent lows. The March contract on ICE New York climbed +98 points (+1.83%), while London March futures advanced +24 points (+0.61%). The recovery came after a weaker dollar environment encouraged short-covering activity across cocoa positions.

Index Inclusion Creates Fresh Buying Catalyst

The addition of cocoa futures to the Bloomberg Commodity Index (BCOM) this week is expected to inject significant fresh capital into the market. Citigroup estimates the inclusion could trigger approximately $2 billion in buying interest for New York cocoa futures as funds rebalance their commodity exposure. Research firms project that the annual index rebalancing alone could generate purchases of roughly 37,000 cocoa contracts—nearly 31% of total open interest—representing substantial inflow momentum.

Tighter Supply Picture Supports Prices

Supply-side fundamentals are increasingly supportive for price levels. Ivory Coast farmers, representing the world’s largest cocoa production base, shipped 1.13 million metric tons to ports during the current marketing year (October 1 through January 11), marking a 2.6% decline from the prior-year equivalent period’s 1.16 MMT.

The global supply picture has shifted materially in recent months. The International Cocoa Organization (ICCO) significantly downgraded its 2024/25 global surplus forecast to just 49,000 MT in December, down sharply from its November estimate of 142,000 MT. This represents the first surplus after four consecutive years of deficits. ICCO also reduced its 2024/25 production estimate to 4.69 MMT from the prior 4.84 MMT projection, though this still reflects a +7.4% year-over-year increase from the prior crop. Meanwhile, Rabobank trimmed its 2025/26 surplus outlook to 250,000 MT from an earlier 328,000 MT forecast.

Production concerns extend to Nigeria, the world’s fifth-largest producer. Nigeria’s Cocoa Association projects that 2025/26 output will decline 11% year-over-year to 305,000 MT, down from the current crop’s anticipated 344,000 MT.

Demand Weakness Remains a Headwind

Global grinding activity—a proxy for chocolate maker demand—has deteriorated across major regions. Asian cocoa grindings fell 17% year-over-year in Q3 to 183,413 MT, marking the weakest third-quarter performance in nine years. European grindings dropped 4.8% year-over-year to 337,353 MT, representing the lowest Q3 reading in a decade. North American grindings rose 3.2% year-over-year, though this data was distorted by the inclusion of new reporting participants.

Inventory and Weather Considerations

U.S. port-held cocoa inventories declined to a 9.75-month trough of 1.63 million bags on December 26, though they have since recovered to 1.68 million bags. On the supply side, West Africa’s benign weather conditions and healthy pod counts—running 7% above the five-year average according to chocolate manufacturers—may support the ongoing harvest in Ivory Coast and Ghana, potentially capping price upside despite the supportive supply fundamentals.

A regulatory wildcard emerged when the European Parliament approved a one-year postponement to the EU Deforestation Regulation (EUDR) in late November. The delay will allow continued imports from deforestation-prone regions in Africa, Indonesia, and South America, potentially keeping supply channels more fluid than anticipated.

The cocoa market is balancing tighter fundamental supply dynamics against persistent demand softness and improved harvest prospects in key producing regions.