Global Cocoa Surplus Tightens, Sparking New Wave of Buying Interest

The cocoa market experienced a sharp reversal on Tuesday as traders repositioned ahead of a significantly revised supply outlook. ICE New York cocoa futures for March delivery ([CCH26]) advanced 122 points or 2.08%, while ICE London cocoa #7 ([CAH26]) gained 128 points, representing a 3.02% increase. The rally was underpinned by a major downward revision of expected global inventories.

Supply Squeeze Reshaping Market Dynamics

Citigroup’s latest assessment of the market fundamentals painted a dramatically different picture than just six months prior. The investment bank slashed its 2025/26 global cocoa surplus projection to 79,000 metric tons from a previous September estimate of 134,000 MT—a reduction of more than 40%. This substantial tightening of the supply-demand balance triggered aggressive short covering, as market participants rushed to cover bearish positions amid recognition of constrained availability.

The surplus compression reflects the worsening production backdrop that has persisted throughout the season. Back in November, the International Cocoa Organization (ICCO) had already downgraded its 2024/25 production estimate to 4.69 million metric tons from 4.84 MMT previously. For 2024/25, ICCO established a modest surplus of just 49,000 MT—marking the first year in four with any surplus at all. This represents a dramatic swing from the catastrophic deficit of 494,000 MT recorded in 2023/24, which had been the largest shortfall in over six decades. The organization also noted that global stocks-to-grindings ratios had compressed to 27.0%, a 46-year low.

Rabobank independently corroborated this tightening narrative Tuesday, revising downward its 2025/26 surplus estimate to 250,000 MT from its November projection of 328,000 MT.

Inventory Contraction Reinforces Price Support

Physical market conditions are aligning with the fundamental supply story. ICE-monitored cocoa inventories warehoused at United States ports have contracted to 1,651,199 bags—a nine-month low as of Tuesday’s close. The depletion of nearby supplies typically generates near-term support for futures prices, as market participants recognize the reduced buffer of available material.

Passive Fund Demand on the Horizon

A structural factor could amplify buying pressure in the weeks ahead. Beginning in January, New York cocoa futures will gain inclusion in the Bloomberg Commodity Index (BCOM), marking the first time the contract has achieved such broad index recognition. Citigroup estimates this development could trigger as much as $2 billion in passive fund purchases during the opening week of January, as investment vehicles tracking the index rebalance their commodity allocations.

Production Risks Extending into Next Year

Beyond near-term supply metrics, longer-term production concerns are building. Nigeria, the world’s fifth-largest producer, faces headwinds with its Cocoa Association projecting output will contract by 11% year-over-year in 2025/26 to 305,000 MT, down from an estimated 344,000 MT for the current crop year. September export data showed Nigerian shipments essentially flat year-over-year at 14,511 MT, suggesting little near-term relief from West Africa’s number two producer.

Mild Headwinds from Record Arrivals and Demand Softness

The narrative is not entirely supportive, however. Ivory Coast—the world’s dominant producer accounting for roughly 40% of global supply—reported shipping 895,544 MT of cocoa to ports during the October 1 through December 14 period of the new marketing year. This represented a marginal 0.2% increase versus the same timeframe a year earlier, suggesting farmers are delivering at a modest pace despite optimism about quality. The newly commenced main harvest has farmers expressing confidence in this year’s crop quality, aided by recent dry conditions that have assisted bean processing.

Demand metrics paint a picture of persistent consumer weakness across major consuming regions. The Cocoa Association of Asia reported Q3 grinding volumes fell 17% year-over-year to 183,413 MT, marking the smallest third-quarter processing in nine years. The European Cocoa Association similarly documented Q3 European grindings declined 4.8% year-over-year to 337,353 MT, the lowest comparable quarterly figure in a decade. While North American Q3 grindings rose 3.2% to 112,784 MT, this data was skewed by the addition of new reporting companies. Downstream, chocolate candy sales volume across North America contracted over 21% in the 13-week period ending September 7, and Hershey’s leadership characterized Halloween chocolate sales as “disappointing” despite the holiday’s importance to annual confectionery revenues.

Regulatory Tailwinds Supporting Supply Expansion

The European Union’s one-year delay to its deforestation regulation (EUDR) announced November 26 by the European Parliament could sustain ample supplies over the medium term by allowing continued agricultural imports from deforestation-prone regions in Africa, Indonesia, and South America.

Despite these offsetting concerns, the rebalancing of global surplus estimates toward constraint—combined with depleted nearby inventories and prospective structural demand from passive index funds—appears to have shifted the near-term technical and fundamental backdrop in favor of buyers.