Cocoa's Technical Bounce Masks Structural Surplus Threatening Price Floor

The rally that lifted London cocoa prices by 30 points on March 6 was a classic technical bounce, sparked by a sudden spike in shipping costs. The conflict in Iran has halted most traffic through the Strait of Hormuz, jacking up global freight rates and insurance premiums. For cocoa importers, this directly raises the cost of moving beans, creating a near-term supply friction that prices reacted to. Yet this rebound is fragile, a sharp pop against a backdrop of deep structural weakness.

The core tension is clear. Just weeks earlier, prices had hit a 3-year low in February, pressured by the expectation of a massive supply glut. The fundamental story remains one of abundant production and slack demand. The International Cocoa Organization recently raised its surplus estimate for the 2024/25 season, and analysts are projecting a global surplus of 365,000 tons for the 2025/26 crop year. This forecast underscores a market where supply is outpacing consumption, a dynamic that has been building for months.

Viewed another way, the March 6 move was a brief technical relief rally. It followed a seven-week downtrend and a period where prices had fallen sharply, with cocoa down 61.74% compared to the same time last year. The rally offered a momentary reprieve, but it did not change the underlying inventory accumulation or the forecast for a record surplus. The shipping shock provided a temporary cost floor, but it did not address the core imbalance of too many beans chasing too few buyers. For now, the rally looks more like a bounce off a low base than the start of a sustained recovery.

Supply: The Surplus is Real and Growing

The market's recent technical bounce cannot obscure the fundamental trend: cocoa supply is not just holding steady, it is accelerating. The critical metric is the projected 8.4% year-over-year increase in global production to 4.7 million tons for the 2024/25 crop year. This marks the first surplus in four years, a structural shift from the tightness that drove prices to multi-decade highs last year. The rally is a reaction to a logistical hiccup, but the underlying trajectory is one of expanding output.

This growth is concentrated in West Africa, the dominant producing region. After two seasons of below-average harvests due to weather and disease, the region is now seeing a rebound. Improved weather forecasts and new plantings are supporting higher output, which analysts note is buoying confidence in harvest prospects. This is the opposite of the supply squeeze that pressured prices in 2024 and 2025. Now, the worry is the opposite: that production will outpace demand.

Inventories are building to reflect this new reality. The International Cocoa Organization reported that global cocoa stocks rose 4.2% year-over-year to 1.1 million tons in early 2026. This accumulation is a direct signal of the surplus. The lack of buyers at official farm-gate prices in key producing nations like the Ivory Coast and Ghana is further boosting supplies, as noted by the ICE cocoa inventories rising to a 5.75-month high. This is a structural trend, not a temporary disruption.

The bottom line is that the market is transitioning from a supply-constrained environment to one of ample supply. The shipping shock in the Strait of Hormuz is a near-term friction that raises costs, but it does not change the forecast for a record surplus. The 8.4% production jump and rising inventories point to a market where the fundamental pressure is downward, not upward.

Demand: The Pressure from the Chocolate Industry

The structural surplus in cocoa is being fueled by a clear and confirmed drop in consumption. The industry's response to last year's historic price spike has been to cut back, a phenomenon known as "demand destruction." This is now backed by hard data. J.P. Morgan's analysis points to a sharp decline in cocoa grindings, the key industrial measure of demand, for the second quarter of 2025. Grindings fell -7.2% in Europe, -16% in Asia, and -2.8% in North America year-over-year. The collapse in Asia is particularly stark, coming in some -13% below average industry expectations. This is the "hangover" from last year's highs, as manufacturers grapple with higher costs and tighter margins.

This feedback loop is now in motion. To protect their profitability, chocolate manufacturers are raising prices. J.P. Morgan projects the industry could raise confectionery prices potentially by the teens this year. While necessary for margins, this pass-through is expected to pressure sales volumes further. The strategy is a classic trade-off: higher prices to cover input costs, but at the cost of volume. This dynamic is already visible in the market, where volumes have fallen as prices increase.

The result is a self-reinforcing cycle that supports the surplus outlook. As chocolate prices rise, consumers become more price-sensitive, shifting to private labels or cutting back entirely. This further dampens demand for cocoa beans, which in turn puts more downward pressure on prices. The industry's grind data confirms that the demand side of the equation is weakening, not strengthening. For the market to find balance, this cycle must reverse, which will require a major improvement in supply and available stocks-a process that is still months away.

Catalysts and Risks: What Could Shift the Balance

The market's current setup hinges on a few key metrics and events that will determine whether the structural surplus persists or a genuine crunch emerges. The most immediate data point is the International Cocoa Organization's next forecast for the 2025/26 season. The organization has already raised its surplus estimate for the current season, and its updated projection for the coming year will be critical. Earlier forecasts, like StoneX's, pointed to a global surplus of 287,000 MT for 2025/26. Any revision to that number, especially a downward adjustment, would be a major bullish signal. Conversely, a higher surplus estimate would confirm the bearish thesis.

A second, more immediate factor is the normalization of shipping costs. The recent price support from the war in Iran halting shipping traffic through the Strait of Hormuz is a temporary friction. As shown by the all-time high VLCC freight rates in the region, this disruption has significantly raised the cost of moving cocoa. If the conflict de-escalates and shipping lanes reopen, those elevated costs will fade. This would remove a key near-term floor from prices, potentially accelerating the downside if the underlying surplus remains unchanged.

The primary long-term risk to the surplus thesis is a weather-related shock in West Africa. After two seasons of below-average harvests, the region is now seeing a rebound driven by favorable weather forecasts. This is the basis for the projected production increase. However, West Africa's cocoa belt remains vulnerable to the same climate volatility that caused the prior supply squeeze. A new bout of drought, excessive rain, or a resurgence of disease could disrupt the expected ramp-up in output. Such a shock would quickly reverse the surplus outlook, creating a supply crunch that could reignite price volatility.

For now, the balance favors the surplus. The market is watching the ICCO's next report, shipping costs are elevated but temporary, and the weather forecast is supportive. But the risk of a weather-driven production setback in the world's dominant growing region is the wildcard that could shift the entire narrative.