Cocoa Market Bounces Back as Dollar Weakness Prompts Short Covering, Though Clouds Remain Over Demand

Cocoa futures rallied Thursday as currency moves triggered short covering activity. The March ICE New York contract climbed 27 points (0.65%), while the March ICE London cocoa #7 gained 29 points (1.01%). This modest rebound follows a steep selloff period that saw London cocoa touch a 2.25-year low midweek and New York cocoa reach a 2-year low the previous week. Despite the relief bounce, longer-term concerns continue to weigh on the market—a fact reflected in the quotes across global exchanges where supply-demand imbalances dominate the narrative.

Dollar Weakness Sparks Technical Relief, But Structural Headwinds Persist

The short-term rally traces back to dollar weakness, which prompted traders holding short positions to cover their bearish bets. This covering activity provided temporary support, a common pattern in commodity markets when currency movements shift. However, this technical bounce masks deeper structural challenges facing cocoa. Global supplies remain abundant while end-user demand continues to erode, creating an environment where each quotes update highlights the fundamental weakness beneath any price recovery.

The Demand Crisis: Chocolate Consumers Resist Higher Prices

One of the most significant clouds hanging over cocoa is collapsing demand. Barry Callebaut AG, the world’s largest bulk chocolate manufacturer, reported a startling 22% decline in cocoa division sales volume for the quarter ending November 30, directly attributed to consumers balking at elevated chocolate prices and market demand weakness. This trend extends across all major grinding regions. European cocoa grindings fell 8.3% year-over-year to 304,470 MT in Q4—the weakest quarterly performance in 12 years and worse than the expected 2.9% decline. Asian grindings declined 4.8% year-over-year to 197,022 MT, while North American grindings barely moved, rising just 0.3% year-over-year to 103,117 MT.

The Cocoa Association of Asia and National Confectioners Association data underscore a critical reality: regardless of production levels, actual cocoa consumption is contracting as chocolate makers and consumers resist current price levels. This structural demand challenge adds another layer of clouds to the market’s outlook.

Supply Overhang: Forecasters See Surpluses Extending Through 2027

The abundance of cocoa supplies threatens to keep prices under pressure for years. StoneX projects a global surplus of 287,000 MT for the 2025/26 season, followed by a 267,000 MT surplus in 2026/27. This sustained oversupply contrasts sharply with the historical context: the International Cocoa Organization reported a record deficit of 494,000 MT in 2023/24, the largest in over 60 years. However, production rebounded 7.4% in 2024/25 to reach 4.69 MMT, trimming the surplus to just 49,000 MT.

Looking ahead, Rabobank recently lowered its 2025/26 global surplus forecast to 250,000 MT from a November projection of 328,000 MT—a reduction that offers modest relief but does nothing to eliminate the structural oversupply picture. Global cocoa stocks rose 4.2% year-over-year to 1.1 MMT according to ICCO data, further confirming the supply abundance that caps any short covering rally.

West African Harvest Provides Headwind; Nigeria’s Decline Offers Limited Support

Favorable growing conditions in West Africa are expected to boost the February-March cocoa harvest, particularly in Ivory Coast and Ghana, where farmers report larger, healthier pods compared to last year. Chocolate maker Mondelez noted that the latest cocoa pod count in West Africa stands 7% above the five-year average, a clear signal of robust production ahead. However, Ivory Coast farmers have been somewhat reluctant to ship supplies, with cumulative exports down 3.2% year-over-year to 1.20 MMT through late January—a reflection of lower prices discouraging rapid sales.

The one bright spot comes from Nigeria, the world’s fifth-largest producer. November exports fell 7% year-over-year to 35,203 MT, and the Cocoa Association of Nigeria projects a concerning 11% production decline for 2025/26 to 305,000 MT. This supply reduction offers modest support for prices, but it’s insufficient to offset West African abundance or resolve the broader demand clouds facing the market.

Inventory Swings Add to Market Volatility

ICE-monitored cocoa inventories in US ports surged to a 2.5-month high of 1,775,219 bags on Thursday, climbing sharply from a 10.5-month low of 1,626,105 bags just weeks earlier on December 26. This rapid inventory buildup represents a bearish development, signaling ample supplies are reaching physical delivery centers—a factor that typically pressures prices and undercuts any short covering rallies.

The Market Paradox: Technical Relief vs. Fundamental Weakness

Thursday’s rally illustrates a classic market dynamic: short covering can trigger a quick bounce when technical conditions align (dollar weakness, oversold positioning), but it rarely leads to sustained price recovery when fundamental clouds obscure the outlook. The cocoa market faces years of supply surplus, contracting demand from major consumers, and rising inventories. While the short covering activity provided Thursday’s positive quotes, the structural headwinds suggest any bounces will face selling pressure from participants who believe prices remain fundamentally overvalued given the supply-demand imbalance.

Traders watching cocoa should distinguish between the tactical relief provided by dollar movements and short covering from the strategic challenge posed by years of forecasted surplus and eroding demand from chocolate manufacturers. Until demand recovers or production faces meaningful setbacks, any short-covering rallies are likely to encounter clouds of overhead selling.