Cocoa Exporters' Hedging Strategy Triggers Sharp Market Selloff

The Perfect Storm: Why Cocoa Prices Are Under Pressure

Cocoa markets experienced a brutal Friday session, with March ICE NY cocoa retreating 732 points (-12.05%) and March ICE London cocoa falling 452 points (-10.35%). NY cocoa sank to a 6-week low while London cocoa hit a 1-month low. The culprit? A coordinated wave of hedging activity from exporters cashing in on Thursday’s brief rally to lock in better terms before the West African harvest season kicks into high gear.

Exporters Lock In Gains Through Strategic Hedging

The hedging pressure came at the worst possible moment. Having watched cocoa futures surge to 1-week highs on Thursday due to index rebalancing expectations, exporters seized the opportunity to place short hedges—essentially betting on lower prices ahead. This defensive strategy intensified when the dollar index (DXY00) climbed to a 4-week high on Friday, making dollar-denominated cocoa futures less attractive to overseas buyers and fueling additional selling.

Peak Trading Research flagged a critical development: upcoming commodity index rebalancing could involve purchases of approximately 37,000 cocoa futures contracts within the next week—representing nearly 31% of total open interest. Yet this bullish catalyst failed to offset the hedging headwinds.

Supply-Side Tailwinds Pressure Prices

West African growing conditions couldn’t be better, and that’s bad news for price bulls. Tropical General Investments Group reported that favorable weather across the Ivory Coast and Ghana is expected to supercharge the February-March harvest, with farmers observing larger and healthier pods compared to last year. Chocolate manufacturer Mondelez confirmed this optimism, noting that current cocoa pod counts in West Africa are running 7% above the 5-year average and “materially higher” than 2024’s crop.

Harvest momentum is building. The Ivory Coast—accounting for roughly one-third of global cocoa production—has begun harvesting its main crop, and farmer sentiment around crop quality remains upbeat.

Conflicting Signals on Inventory Dynamics

While fresh supply concerns typically weigh on prices, inventory trends send mixed messages. Ivory Coast shipments to ports totaled just 1.073 MMT during the current marketing year (October 1 through January 4), down 3.3% from 1.11 MMT a year ago. This should provide some floor under prices.

However, ICE-monitored US port cocoa inventories tell a different story. After hitting a 9.75-month low of 1,626,105 bags on December 26, stocks have since rebounded to a 4-week high of 1,660,515 bags as of Friday, suggesting that supply tightness concerns may be overstated.

Global Production Outlook Tightens, But Demand Remains Soft

The International Cocoa Organization (ICCO) has dramatically revised its 2024/25 surplus forecast to just 49,000 MT from a prior 142,000 MT estimate—the first surplus after a massive 494,000 MT deficit in 2023/24. Global cocoa production for 2024/25 is pegged at 4.69 MMT, up 7.4% year-over-year from 4.368 MMT in 2023/24.

Yet demand weakness threatens to offset this tighter supply picture. Asia cocoa grindings in Q3 plunged 17% year-over-year to 183,413 MT—the smallest third-quarter throughput in 9 years. European grindings fell 4.8% year-over-year to 337,353 MT, marking the lowest Q3 in a decade. North American grindings rose 3.2% to 112,784 MT, though new reporting companies distorted the comparison.

Regulatory Delays and Nigeria’s Production Decline Offer Limited Support

On the positive side, the European Parliament approved a 1-year delay to its deforestation regulation (EUDR) on November 26, allowing continued imports from regions where forest clearing is occurring. This keeps cocoa supply channels open and prices under structural pressure.

Nigeria, the world’s fifth-largest cocoa producer, is facing headwinds. The Nigerian Cocoa Association projects 2025/26 production will slide 11% year-over-year to just 305,000 MT. September cocoa exports held flat at 14,511 MT, offering no growth momentum.

What’s Next for Traders?

The inclusion of cocoa futures in the Bloomberg Commodity Index (BCOM) starting this month could attract as much as $2 billion in buying pressure for NY cocoa, according to Citigroup. Yet with exporters actively hedging, favorable harvest conditions on the horizon, and global demand struggling to find its footing, price bulls face an uphill battle in the near term.