Cocoa Market Gets a Fresh Boost: What's Driving the Rally Beyond Index Inclusion?

Cocoa futures are trading with notable momentum as traders digest a confluence of bullish signals. March contracts on ICE NY climbed +26 points (+0.44%), while the London contract retreated -87 points (-2.02%), reflecting divergent regional sentiment. The net effect points to underlying strength in the commodity complex, with several structural forces at play.

Index Inclusion: The $2 Billion Question

The primary catalyst fueling NY cocoa enthusiasm stems from Bloomberg’s decision to add cocoa futures to its Commodity Index (BCOM) starting in January. Citigroup analysts estimate this inclusion could unleash approximately $2 billion in fresh buying pressure on NY futures contracts. This type of passive index-tracking demand represents a structural bid that’s difficult for the market to ignore, particularly when sentiment is already constructive on the commodity’s fundamentals.

Supply Tightness Reshaping the Outlook

The global cocoa picture has shifted dramatically over recent months. The International Cocoa Organization (ICCO) made a striking revision in late November, slashing its 2024/25 surplus estimate to just 49,000 MT—down from an earlier projection of 142,000 MT. Production estimates were similarly trimmed to 4.69 MMT from 4.84 MMT, signaling a much tighter market environment than previously assumed.

Rabobank reinforced this downward revision on Tuesday, cutting its 2025/26 surplus forecast to 250,000 MT from 328,000 MT projected in November. Meanwhile, inventory levels are telling their own story: ICE-monitored cocoa stocks at US ports hit a 9.5-month low of 1,626,861 bags this week, further validating supply constraints.

Production Headwinds: Nigeria Signals Weakness

Contributing to the supply squeeze, Nigeria—the world’s fifth-largest cocoa producer—is expected to face production headwinds. The Nigerian Cocoa Association projects a -11% year-over-year decline in 2025/26 output, with production sliding to 305,000 MT from an estimated 344,000 MT this season. September export volumes remained flat at 14,511 MT, offering no relief on the export front.

In contrast, Ivory Coast—the dominant global supplier—shipped 970,945 MT during the current marketing season (Oct 1-Dec 21), essentially flat versus the prior year. However, chocolate manufacturer Mondelez recently reported that West African cocoa pod counts are running 7% above the five-year average and “materially higher” than last year, suggesting a potential supply improvement ahead if harvest execution remains on track.

Demand: The Persistent Weak Link

Despite supportive supply dynamics, demand remains the commodity’s Achilles’ heel. Q3 global cocoa grindings painted a sobering picture: Asia’s processing fell -17% year-over-year to just 183,413 MT (a 9-year Q3 low), while Europe’s grindings declined -4.8% y/y to 337,353 MT (a 10-year Q3 trough). North America showed modest growth of +3.2% to 112,784 MT, though new reporting entrants likely distorted the data.

North American chocolate candy sales volume plummeted more than -21% during the 13 weeks ending September 7 compared to last year. This weakness extended to the Halloween season, with Hershey’s CEO describing chocolate sales performance as “disappointing”—a notable commentary given that Halloween represents nearly 18% of annual US candy sales.

Policy Tailwinds for Cocoa Supply

A regulatory reprieve offered unexpected support to cocoa supply dynamics. The European Parliament approved a one-year delay to the deforestation regulation (EUDR) on November 26, allowing EU importers to continue sourcing from regions where deforestation activity persists. While this policy move theoretically keeps cocoa supplies more ample, the structural deficit concerns from prior seasons continue to overshadow this relief.

The Cocoa Tree Recovery Story

Weather conditions in West Africa have proven favorable for cocoa tree development. Farmers in Ivory Coast reported a beneficial mix of rainfall and sunshine promoting pod formation, while Ghana experienced regular rains supporting tree and pod maturation ahead of the harmattan season. This improved growing environment contrasts sharply with the severe production shortfalls witnessed in 2023/24, when global output collapsed -12.9% y/y to 4.368 MMT—marking the largest cocoa deficit in over 60 years.

The market appears to be pricing in a normalization story: tight current supplies providing support, while improving production prospects and persistently weak demand create a more balanced medium-term picture. The cocoa complex’s ability to sustain gains will ultimately hinge on whether index-related buying and supply concerns outweigh the gravitational pull of subdued chocolate demand.