Short-Covering Rally Fuels Cocoa Recovery as Supply Tightens

Thursday saw a significant turnaround in cocoa futures as currency weakness prompted a wave of short covering. December ICE NY cocoa surged +165 points (+3.34%), while December ICE London cocoa climbed +83 points (+2.19%), reversing the steep declines that had plagued the market over the previous two weeks. The momentum shift reflects how oversold conditions in cocoa contracts had become vulnerable to any catalyst for technical buying.

The Dollar Effect and Inventory Squeeze

A weaker US dollar served as the immediate trigger for Thursday’s rally, a classic driver of commodity short covering. But the supporting fundamentals run deeper. ICE-tracked cocoa inventories stored at US ports contracted to an 8-month low of 1,738,691 bags on Thursday, providing genuine supply-side tightness that underpins prices. This inventory squeeze represents a meaningful constraint on available supplies, particularly as demand remains structurally elevated from processing and chocolate manufacturing commitments.

Policy Uncertainty Weighs on Markets

Wednesday had brought a sharp selloff that pushed cocoa prices to 1.75-year lows, driven by news that European Union nations were pressuring regulators to delay the EU’s Deforestation Regulation (EUDR) by one year. The EUDR framework targets deforestation in supplying nations for key commodities including cocoa and soybeans. A postponement of the initially planned late-December implementation would ease near-term restrictions on imports from African, Indonesian, and South American producers where deforestation practices occur—a development that eased supply anxiety but also raised concerns about regulatory uncertainty heading into 2025.

West African Optimism Clashing with Global Pessimism

The supply picture from West Africa presents an interesting paradox. Ivory Coast farmers report healthy cocoa tree development, and recent dry weather has facilitated bean drying. Ghanaian producers highlight favorable weather conditions accelerating pod maturation. Mondelez executives noted that current West African pod counts are running 7% above the five-year average and “materially higher” than last year’s harvest. Ivory Coast’s main crop harvest has just kicked off, and farmer sentiment around quality remains upbeat.

Yet this West African strength masks a troubling global demand environment. As of mid-November, Ivory Coast—the world’s leading cocoa producer—shipped 516,787 MT to ports since the October 1 start of the marketing year through November 16, representing a -5.7% decline from 548,494 MT in the comparable 2023 period. This slowdown in export activity suggests market skepticism about demand despite ample supply expectations.

Chocolate Sales Tell a Troubling Story

Weak consumer demand serves as the primary headwind for cocoa. The Hershey Company’s CEO reported “disappointing” chocolate sales during the Halloween season, a period that accounted for nearly 18% of annual US candy sales in 2024—second only to Christmas in importance. Such Halloween quotes about weak seasonal performance underscore how retail chocolate demand is struggling to maintain historical patterns.

Grinding data from key consuming regions reinforce this demand weakness:

• Asia: Q3 cocoa grindings fell -17% y/y to 183,413 MT, marking the smallest third-quarter output in 9 years
• Europe: Q3 grindings declined -4.8% y/y to 337,353 MT, the lowest Q3 result in a decade
• North America: Q3 grindings rose +3.2% y/y to 112,784 MT, though this gain was partly attributable to new reporting companies entering the data

More concerning, North American chocolate candy sales volumes plummeted over -21% in the 13 weeks ending September 7 compared to year-ago levels, per research firm Circana.

Production Headwinds Emerging

Nigeria, the world’s fifth-largest cocoa producer, offers a counterpoint to West African abundance. Nigeria’s Cocoa Association projects the nation’s 2025/26 production will contract -11% y/y to 305,000 MT from an estimated 344,000 MT in 2024/25. September Nigerian cocoa exports held flat y/y at 14,511 MT, providing no growth relief.

The Deficit Story

The International Cocoa Organization’s historical perspective underscores long-term supply tension. In May, ICCO revised its 2023/24 global cocoa deficit to -494,000 MT—the largest shortfall exceeding 60 years of records. That year’s production collapsed -13.1% y/y to 4.380 MMT, and the global stocks-to-grindings ratio hit a 46-year low of 27.0%.

For 2024/25, ICCO forecasts a swing to a +142,000 MT surplus—the first surplus in four years—with global production projected up +7.8% y/y to 4.84 MMT. However, this normalization comes against a backdrop of severely depleted inventory buffers, meaning limited cushion against supply disruptions.

Tariff Headwind Fades

Additional pressure came when the Trump administration announced last Friday that it was removing the proposed 10% reciprocal tariff on non-US-grown commodities, including cocoa. While this removes an upside risk to prices from a trade war scenario, it also removes a potential demand-dampening factor that had been supporting some price defense.

The Takeaway

Thursday’s cocoa price recovery reflects genuine short covering amid technical oversold conditions, but the fundamental picture remains mixed. Inventory tightness and prospective production issues in Nigeria provide constructive elements. Yet weak chocolate demand globally, particularly the disappointing Halloween season results, and the anticipated West African bumper crop create headwinds. The market remains caught between supply constraints and demand weakness—a dynamic that could persist through the remainder of the season.