Cocoa Prices Drop Sharply as Exporters Brace for the Forthcoming West African Harvest

Cocoa Futures Experience Significant Decline

March contracts for ICE NY cocoa (CCH26) have dropped by 706 points, a decrease of 11.62%, while March ICE London cocoa #7 (CAH26) has fallen by 451 points, or 10.33%.

Today, cocoa prices are experiencing a sharp downturn, with New York cocoa reaching its lowest point in six weeks and London cocoa hitting a one-month low. Exporters have taken advantage of last week's price surge to secure better rates by hedging against the upcoming West African harvest, which has contributed to the steep decline. The sell-off intensified as the U.S. dollar index climbed to a four-week high.

Market Drivers and Recent Developments

Last Thursday, cocoa prices surged to their highest level in a week, fueled by expectations that commodity index funds would increase their cocoa futures holdings during annual rebalancing. Peak Trading Research estimates that this rebalancing could result in the purchase of approximately 37,000 cocoa contracts, which is nearly 31% of total open interest.

Favorable weather in West Africa is currently putting downward pressure on cocoa prices. According to Tropical General Investments Group, improved growing conditions are expected to enhance the February-March cocoa harvest in both Ivory Coast and Ghana, with farmers reporting larger and healthier pods compared to the previous year.

Mondelez, a major chocolate producer, recently noted that the latest cocoa pod count in West Africa is 7% above the five-year average and significantly higher than last year. The main harvest in Ivory Coast has started, and local farmers are optimistic about the crop's quality.

Despite these positive harvest prospects, cocoa prices are finding some support due to reduced shipments from Ivory Coast. Recent data shows that farmers have delivered 1.073 million metric tons (MMT) of cocoa to ports since October 1, a 3.3% decrease from the same period last year. Ivory Coast remains the world's leading cocoa producer.

Additional support for cocoa prices comes from expectations of increased index-related buying, as cocoa futures are now being added to the Bloomberg Commodity Index (BCOM). Citigroup estimates that this inclusion could attract up to $2 billion in purchases of NY cocoa futures.

Supply, Demand, and Regulatory Factors

Lower cocoa inventories are boosting prices, with ICE-monitored stocks in U.S. ports dropping to a 9.75-month low of 1,626,105 bags as of December 26. However, inventories have since rebounded to a 3.5-week high of 1,658,056 bags.

The outlook for global cocoa supply is tightening. On November 28, the International Cocoa Organization (ICCO) reduced its estimate for the 2024/25 global cocoa surplus to 49,000 metric tons (MT), down from 142,000 MT previously. The organization also lowered its global production forecast for 2024/25 to 4.69 MMT from 4.84 MMT. Similarly, Rabobank recently cut its 2025/26 surplus projection to 250,000 MT from 328,000 MT.

On the regulatory front, cocoa prices faced downward pressure after the European Parliament postponed the implementation of a new deforestation law by one year. This delay allows continued imports of agricultural products, including cocoa, from regions where deforestation is ongoing, such as parts of Africa, Indonesia, and South America.

Weak demand is also weighing on prices. The Cocoa Association of Asia reported that third-quarter cocoa grindings in Asia dropped 17% year-over-year to 183,413 MT, the lowest for any Q3 in nine years. In Europe, grindings fell 4.8% to 337,353 MT, a ten-year low for the third quarter. North American grindings rose by 3.2% to 112,784 MT, but this increase was influenced by the addition of new reporting companies.

Production Trends and Forecasts

Reduced output in Nigeria, the world's fifth-largest cocoa producer, is providing some price support. The Nigerian Cocoa Association expects the country's 2025/26 cocoa production to decline by 11% year-over-year to 305,000 MT, down from a projected 344,000 MT for 2024/25. Meanwhile, Nigeria's cocoa exports in September remained steady at 14,511 MT compared to the previous year.

On May 30, the ICCO revised its estimate for the 2023/24 global cocoa deficit to -494,000 MT, the largest shortfall in over six decades. The organization reported a 12.9% year-over-year drop in 2023/24 cocoa production to 4.368 MMT. However, for 2024/25, the ICCO anticipates a global surplus of 49,000 MT, marking the first surplus in four years, with production expected to rise by 7.4% to 4.69 MMT.