Just caught up on the cocoa market this week and there's some interesting dynamics playing out. Prices spiked Friday with NY cocoa up 5.73% and London up 4.99% - mostly driven by short covering as traders got nervous about the Iran situation and potential Strait of Hormuz disruptions. If shipping costs spike, that's going to hit cocoa exports hard.

But here's the thing - the underlying fundamentals are pretty weak. ICCO just raised their global surplus estimate to 75,000 MT for 2024/25, and Rabobank is projecting a 250,000 MT surplus for next season. Meanwhile, demand is getting crushed. Barry Callebaut reported a 22% drop in cocoa sales volume, and European grinding fell 8.3% year-over-year in Q4. Chocolate makers are getting hit by high prices.

The supply picture is actually pretty favorable though. Cocoa pod counts in West Africa are running 7% above the five-year average, and farmers are reporting larger, healthier cocoa pods compared to last year. Ghana and Ivory Coast both cut farmer payments by huge amounts (Ghana down 30%, Ivory Coast down 57%), which is weighing on sentiment but actually supporting supplies. Ivory Coast mid-crop should be solid - those cocoa pods are looking good.

Nigeria's also exporting more despite production headwinds. Their December exports jumped 17% year-over-year. The real issue is demand - consumers are just done paying these prices for chocolate. ICE inventories actually hit a 6.5-month high on Friday, which tells you everything about where the market sits. Short covering might give us a bounce, but I'd be watching demand data closely. That's where the real pressure is coming from.