Cocoa Prices Plunge as Global Supplies Build and Demand Wanes

ICE cocoa futures plunged, with March NY down 298 ticks (-7.26%) and March London down 204 ticks (-6.90%), marking a 2.25‑year nearest‑futures low amid a six‑week collapse. Selling is being driven by abundant supplies and weak demand: ICE inventories hit 1,812,564 bags (a 3.25‑month high), ICCO stocks rose 4.2% y/y to ~1.1 MMT, and Q4 grindings in Europe and Asia were sharply lower (Europe Q4 grindings -8.3% y/y to 304,470 MT). Analysts project ongoing surpluses (StoneX: 287,000 MT surplus in 2025/26; Rabobank and ICCO also trimming/adjusting balances), though localized supply issues (Ivory Coast shipments down 3.8% y/y to 1.27 MMT YTD; Nigeria projects production -11% y/y) provide limited support.

Analysis

Market structure: Rapid cocoa price declines (NY -7.3% today; 6-week freefall; ICE stocks at 1,812,564 bags; ICCO stocks ~1.1 MMT) transfer value from upstream growers/commodity traders to downstream chocolate makers. Winners: large processors/brand owners (MDLZ, Hershey) gain margin tailwind as cocoa costs compress; losers: small-origin suppliers, hedgers and speciality traders face margin pressure and potential balance-sheet write-downs. Competitive dynamics favor integrated processors who can lock in procurement and push retail promotions to stimulate demand.

Risk assessment: Immediate (days) momentum risk is high — follow-through selling could push futures another 10–20% lower; short-term (weeks/months) demand indicators (European/Asian grindings) will dictate price exhaustion; long-term (quarters/years) the main tail risks are weather/El Niño, political export restrictions in Côte d’Ivoire/Ghana, or a sudden rebound in grindings if consumer demand recovers. Hidden dependencies include FX moves in CFA/franc zones, inventory accounting at processors, and seasonal harvest cadence (Feb–Mar boost expected).

Trade implications: Tactical short front-month ICE cocoa (CCH26/CAH26) for days–weeks on momentum, size 1–2% portfolio, stop-loss at +12% adverse move; establish a 2–3% long in MDLZ for 3–12 months to capture COGS relief (target 10–15% upside, stop 7%). Use options to define risk: buy 3-month put spreads on CCH26 (ATM buy / -25% sell) sized 0.5–1% portfolio and hedge with 6–9 month cheap call spreads (tail protection).

Contrarian angles: Consensus assumes persistent weak demand and abundant supply; this overlooks rapid supply shocks (disease, export bans) that can flip a surplus into a multi-50k MT deficit inside one crop season. The market may be over-pricing structural demand collapse — if ICCO grindings stabilize (monthly improvement >3% m/m) or Ivory Coast shipments drop >5% y/y, short positions should be unwound quickly. Historical parallel: 2016-17 cocoa swings showed swift reversals when West African weather turned adverse, so keep nimble size and explicit stop/triggers.

Key Decisions for Investors

• Establish a tactical short position in front-month ICE cocoa (CCH26 or CAH26) sized at 1–2% of portfolio notional for a days–weeks trade; set profit target 10–20% and a hard stop at +12% adverse move. Unwind if ICE warehouse stocks fall below 1.6M bags or if ICCO global stocks drop below 1.0 MMT.
• Initiate a 2–3% long position in Mondelez (MDLZ) with a 3–12 month horizon to capture input-cost tailwinds; target 10–15% upside (earnings revision play) and use a 7% stop-loss. Add 0.5% more if Q2 grindings data (monthly) improve < -2% y/y relative to expectation.
• Buy a 3-month put spread on ICE cocoa (buy ATM put, sell 25% lower strike) sized 0.5–1% of portfolio to monetize continued downside with defined risk; simultaneously buy a 6–9 month call spread (far OTM) as protection against a sudden supply shock, cost net limited.
• Run a small pair trade: long MDLZ vs short StoneX (SNEX) 1:1 dollar exposure at 1% each for 3–6 months — thesis is processors outperform commodity flow brokers if grindings and export flows remain weak. Rebalance monthly and close if monthly European/Asian grindings improve >3% m/m or Ivory Coast shipments fall >5% y/y.