## Commodity Index Rebalancing Fuels Cocoa Rally as Global Supply Tightens

Cocoa futures markets staged a robust recovery on Thursday, with March contracts surging to their highest levels in a week. The New York ICE March contract climbed 162 points (+2.74%), while London ICE March contracts gained 109 points (+2.56%), reversing Wednesday's sharp declines.

The primary catalyst behind this upward momentum stems from anticipated index rebalancing activities. Peak Trading Research projects that upcoming annual rebalancing of commodity indexes could trigger purchases of approximately 37,000 cocoa futures contracts—equivalent to nearly 31% of current aggregate open interest. This mechanical buying pressure from commodity prices rebalancing represents a significant structural tailwind for the market.

### Structural Demand from Index Inclusion

Beyond near-term rebalancing dynamics, cocoa has gained fundamental support from its recent addition to the Bloomberg Commodity Index (BCOM) starting this month. Citigroup estimates that BCOM inclusion could attract as much as $2 billion in fresh buying interest directed toward NY cocoa futures. This institutional demand layer adds durability to the current recovery.

### Supply Concerns Outweigh Near-Term Abundance

The supply-demand equation has shifted meaningfully in favor of higher prices. On November 28, the International Cocoa Organization (ICCO) dramatically revised downward its 2024/25 global surplus estimate, slashing it to just 49,000 MT from a prior forecast of 142,000 MT. Concurrently, ICCO lowered its global production estimate for 2024/25 to 4.69 MMT from 4.84 MMT.

This tightening supply narrative extends into 2025/26. Rabobank cut its global cocoa surplus projection for that period to 250,000 MT, down from a November forecast of 328,000 MT, signaling diminishing surpluses across the forecasting horizon.

### West African Harvest Dynamics Create Conflicting Signals

The world's largest cocoa producer, Ivory Coast, offers mixed signals on supply availability. While recent harvest data shows farmers shipped 1.073 MMT of cocoa to ports during the current marketing year (October 1 through January 4), representing a 3.3% year-over-year decline from 1.11 MMT, current crop conditions initially appeared favorable.

Tropical General Investments Group reported last week that West African growing conditions support larger and healthier pods compared to last year's corresponding period, with forecasts for stronger February-March harvests in Ivory Coast and Ghana. Chocolate manufacturer Mondelez noted that the latest cocoa pod count in West Africa runs 7% above the five-year average.

However, this temporary abundance pressure was reversed Thursday as traders refocused on medium-term supply constraints. Nigeria, the world's fifth-largest producer, presents a bearish supply outlook, with the Nigerian Cocoa Association projecting a 11% year-over-year production decline to 305,000 MT for 2025/26.

### Global Demand Weakness Tempers Optimism

Despite supply-side bullish factors, weak consumption patterns in major grinding regions provide price headwinds. The Cocoa Association of Asia reported that third-quarter Asia cocoa grindings contracted 17% year-over-year to 183,413 MT—marking the smallest Q3 output in nine years. European cocoa grindings similarly declined, with the European Cocoa Association documenting a 4.8% year-over-year drop to 337,353 MT during Q3, the weakest third quarter in a decade.

### Inventory and Regulatory Crosscurrents

Warehouse dynamics present a nuanced picture. ICE-monitored cocoa inventories at US ports had declined to a 9.75-month low of 1,626,105 bags on December 26, supporting the bullish narrative. However, stockpiles recovered to 1,658,056 bags by Thursday, suggesting improved availability at physical locations.

A regulatory headwind emerged when the European Parliament on November 26 approved a one-year delay to the deforestation law (EUDR), permitting continued EU imports of agricultural products from regions experiencing deforestation. This extension temporarily undermines supply-tightening arguments by extending the window for cocoa imports from Africa and Southeast Asia.

### Historical Context: From Deficit to Surplus

The current market dynamics represent a dramatic reversal from 2023/24 conditions. ICCO had calculated a -494,000 MT deficit for 2023/24—the largest shortfall in over six decades—when production plummeted 12.9% year-over-year to 4.368 MMT. The 2024/25 projection of a 49,000 MT surplus marks the first surplus in four years, reflecting the swing from severe undersupply to modest balance.

The convergence of index-driven buying, structural demand from commodity prices rebalancing initiatives, and persistent supply concerns has repositioned cocoa from Wednesday's lows as a market with genuine support beneath current levels. Whether this recovery sustains depends on how quickly mechanical index buying executes and whether global demand shows signs of stabilization.