Cocoa's Short-Term Recovery Conceals Underlying Oversupply Risk to Price Support

London Cocoa Prices: A Brief Rally Amid Ongoing Weakness

On March 6, London cocoa prices surged by 30 points, largely due to a sudden increase in shipping expenses. The conflict in Iran has severely restricted movement through the Strait of Hormuz, causing global freight and insurance costs to climb. For cocoa importers, this means higher transportation expenses and short-term supply disruptions, which the market quickly reflected in prices. However, this uptick is fragile, standing out against a backdrop of persistent structural challenges.

Just weeks before, cocoa prices had dropped to their lowest point in three years, driven by expectations of an oversupply. The fundamental situation remains unchanged: production is abundant while demand is subdued. The International Cocoa Organization recently increased its surplus projection for the 2024/25 season, and analysts anticipate a global surplus of 365,000 tons for the 2025/26 crop year. This highlights a market where supply continues to outpace consumption—a trend that has been developing for some time.

The March 6 price jump was essentially a short-lived technical rebound following a seven-week decline, with cocoa prices down 61.74% compared to the previous year. Although the rally offered temporary relief, it did not alter the ongoing accumulation of inventories or the outlook for a record surplus. The spike in shipping costs provided a brief price floor, but the fundamental issue of excess supply remains unresolved. For now, this movement appears to be a bounce from a low point rather than the start of a lasting recovery.

Expanding Supply: Surplus Continues to Grow

Despite the recent technical rally, the underlying trend is clear: cocoa supply is not only stable but increasing. The key figure is the anticipated 8.4% year-over-year rise in global production to 4.7 million tons for the 2024/25 crop year. This marks the first surplus in four years, signaling a shift from the tight supply that previously pushed prices to historic highs. The recent price movement is a reaction to logistical challenges, but the broader pattern is one of rising output.

Most of this growth is concentrated in West Africa, the leading cocoa-producing region. After two years of poor harvests caused by adverse weather and disease, the area is now experiencing a recovery. Improved climate conditions and new plantings are boosting production, with analysts noting increased optimism about future harvests in the region. This is a reversal from the supply shortages that drove prices higher in 2024 and 2025; now, the concern is that production will exceed demand.

Rising inventories reflect this shift. The International Cocoa Organization reported a 4.2% year-over-year increase in global cocoa stocks, reaching 1.1 million tons in early 2026. This accumulation signals the growing surplus. Additionally, the lack of buyers at official farm-gate prices in major producing countries like Ivory Coast and Ghana is further swelling supplies, as evidenced by ICE cocoa inventories hitting a 5.75-month high. This is a structural change, not a temporary issue.

In summary, the cocoa market is moving from a period of limited supply to one of abundance. While the shipping disruptions in the Strait of Hormuz have temporarily increased costs, they do not alter the forecast for a record surplus. The significant jump in production and growing inventories suggest that downward pressure on prices is likely to persist.

Demand Dynamics: Chocolate Industry Faces Challenges

The ongoing cocoa surplus is being driven by a noticeable decline in consumption. Following last year's dramatic price increases, the industry has responded by reducing demand—a process known as "demand destruction." This trend is now supported by concrete data. According to J.P. Morgan, cocoa grindings, which measure industrial demand, dropped sharply in the second quarter of 2025: -7.2% in Europe, -16% in Asia, and -2.8% in North America year-over-year. The decline in Asia is especially pronounced, falling 13% below average industry expectations. This reflects the aftermath of last year's price surge, as manufacturers struggle with increased costs and tighter profit margins.

To maintain profitability, chocolate producers are raising prices. J.P. Morgan predicts that confectionery prices could increase by double digits this year. While this helps protect margins, it is expected to further reduce sales volumes—a classic trade-off of higher prices for lower demand. This pattern is already evident, with volumes decreasing as prices rise.

This creates a self-reinforcing cycle that sustains the surplus outlook. As chocolate becomes more expensive, consumers become more sensitive to price, opting for cheaper brands or cutting back on purchases altogether. This further reduces demand for cocoa, putting additional downward pressure on prices. Industry grind data confirms that demand is weakening. For the market to stabilize, this cycle must be broken, which will require significant improvements in supply and inventory levels—a process that is likely to take several months.

Potential Catalysts and Risks: What Could Change the Outlook?

The future of the cocoa market depends on several key factors and upcoming events. The most immediate is the International Cocoa Organization's next forecast for the 2025/26 season. The organization has already increased its surplus estimate for the current season, and its updated projection for next year will be crucial. Earlier forecasts, such as StoneX's, suggested a global surplus of 287,000 metric tons for 2025/26. Any downward revision would be a bullish signal, while a higher surplus estimate would reinforce the bearish outlook.

Another important factor is the normalization of shipping costs. The recent price support resulting from the conflict in Iran disrupting traffic through the Strait of Hormuz is a temporary issue. As demonstrated by record-high VLCC freight rates in the region, this disruption has significantly increased cocoa transportation costs. If tensions ease and shipping routes reopen, these elevated costs will likely disappear, removing a key short-term support for prices and potentially accelerating declines if the surplus persists.

The main long-term risk to the surplus scenario is a weather-related shock in West Africa. After two years of poor harvests, the region is now benefiting from favorable weather, which underpins the expected production increase. However, West Africa remains susceptible to climate volatility, including droughts, excessive rainfall, or renewed disease outbreaks. Any such event could quickly disrupt production, reversing the surplus and triggering renewed price volatility.

At present, the surplus outlook prevails. The market is closely monitoring the ICCO's upcoming report, shipping costs remain elevated but are likely temporary, and weather conditions are favorable. Nonetheless, the possibility of a weather-driven production setback in West Africa remains the unpredictable factor that could alter the market's trajectory.