Hedging Activities by Cocoa Exporters Cause Cocoa Prices to Drop Sharply

Cocoa Futures Experience Steep Decline

On Friday, March ICE NY cocoa (CCH26) dropped by 12.05%, closing down 732 points, while March ICE London cocoa #7 (CAH26) ended the day 10.35% lower, falling by 452 points.

Both New York and London cocoa futures saw significant losses, with NY cocoa reaching its lowest level in six weeks and London cocoa hitting a one-month low. The sharp decline came as exporters, capitalizing on Thursday’s price surge, increased short hedging ahead of the upcoming West African harvest. The selloff intensified after the US dollar index climbed to a four-week high, further pressuring cocoa prices.

Related Market Updates from Barchart

Market Drivers and Outlook

Thursday’s rally to one-week highs was fueled by expectations that commodity index rebalancing would prompt significant cocoa futures buying. According to Peak Trading Research, the annual adjustment of commodity indexes could result in the purchase of approximately 37,000 cocoa futures contracts in the coming week, representing nearly 31% of total open interest.

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

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

Despite these positive developments, cocoa prices are finding support due to signs of reduced supply from Ivory Coast. Recent data shows that farmers shipped 1.073 million metric tons (MMT) of cocoa to ports from October 1 to January 4, which is a 3.3% decrease from the same period last year. Ivory Coast remains the world’s top cocoa producer.

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

Inventory Trends and Supply Forecasts

Cocoa inventories monitored by ICE in US ports dropped to a 9.75-month low of 1,626,105 bags on December 26, which was bullish for prices. However, stocks have since rebounded, reaching a four-week high of 1,660,515 bags as of Friday.

The outlook for global cocoa supply remains tight. 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. The ICCO also lowered its global production forecast for 2024/25 to 4.69 MMT from the previous 4.84 MMT. Similarly, Rabobank recently cut its 2025/26 surplus projection to 250,000 MT from 328,000 MT.

Regulatory and Demand Factors

European cocoa supplies remain ample after the European Parliament approved a one-year delay to the deforestation law (EUDR) on November 26. This regulation aims to combat deforestation linked to imports of commodities like soybeans and cocoa. The postponement allows continued imports from regions in Africa, Indonesia, and South America where deforestation is ongoing.

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

Production Updates from Nigeria

Lower cocoa output in Nigeria, the world’s fifth-largest producer, is providing some support to prices. The Cocoa Association of Nigeria forecasts an 11% year-over-year decline in 2025/26 production to 305,000 MT, down from a projected 344,000 MT for 2024/25. Meanwhile, Nigeria’s cocoa exports in September remained unchanged year-over-year at 14,511 MT.

ICCO Global Cocoa Balance Sheet

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