Cocoa

Cocoa is a popular commodity with growing demand, relatively stable production and wide availability through brokers. This guide will explain how to start trading cocoa, from production and consumption figures to factors that move prices. We also list the best cocoa brokers:

Cocoa Trading – The Basics

Cocoa beans originate from seeds of a cacao tree known as Theobroma cacao. Processed cocoa is the main ingredient in chocolate and is used in a range of comestibles such as drinking powder and baked goods, and even in some cosmetics.

The global cocoa market was valued at around $14.5 billion in 2022 and is projected to increase to over $19 billion by 2028. The average trading price of cocoa ranged between $1900 and $2700 per metric ton between 2016 and 2023.

Cocoa demand and production are generally rising. Production is expected to reach over 5 million metric tons in the year 2022/2023. Typically, the beans are sourced in tropical countries near the equator, particularly in Africa.

Large producers include Ghana, Indonesia, Nigeria, Ecuador, Uganda, and the world’s largest producer, the Ivory Coast. In the crop year 2021 to 2022, an average of 2.1 million metric tons of cocoa beans was sourced in the Ivory Coast alone. By comparison, just over 950,000 tons were produced from South American regions during the same time frame, and Ghana, the second largest producer, clocked in around 800,000 tons. The third, Indonesia, produced around 750,000 tons.

All of the world’s top cocoa importers are Western countries, with the USA importing the most followed by Germany, Netherlands, France and Belgium.

Cocoa can be traded on London’s Intercontinental Exchange (ICE) or the New York Mercantile Exchange (NYMEX).

Futures contracts are the most popular investment products when trading cocoa. The ticker symbol on the UK exchange is CC=F.

Why Trade Cocoa?

• Chocolate – Cocoa is the key ingredient in chocolate-based products, with rising demand in recent years. The global chocolate market was valued at just over $131 billion in 2021 with forecasts expecting this figure to reach nearly $196 billion by 2029. Consumer demand for dark chocolate is also on the rise, with individuals recognising its benefits such as antioxidants. Some of the largest food giants with a heavy interest in cocoa include Nestle, Kraft Foods, Mars Inc, Cadbury, and Hershey Foods Corp.
• Portfolio Diversification – Cocoa is a soft commodity that can be introduced to trading portfolios. It is a volatile asset due to various factors influencing supply and demand, and this can bring returns to traders who perform well.  The opportunity to trade cocoa futures also brings the possibility of making trades for hedging purposes.
• Wide Availability – Cocoa is offered by the biggest brokers in the UK, and you should be able to choose from several trading instruments based on your strategy. This includes CFDs, which UK cocoa brokers will usually offer leverage up to 1:10 on, as with other commodities.

Cocoa Price Today

Factors That Impact Cocoa Trading Prices

Weather & Disease

As an agricultural commodity, cocoa supply and companies rely on good weather and healthy crops, and any large impacts on the climate of the world’s major cocoa producers will hit global supply.

A lack of rainfall and sub-par tropical temperatures will reduce the exported volumes of cocoa, while a good harvest will lead to a surplus and lower prices.

Similarly, a disease affecting cacao trees will hit supply, particularly if it spreads in a major cocoa producer.

Geopolitical Events

Economic instability in the major producing countries such as Ghana and Ivory Coast may reduce supply if it reduces the country’s agricultural output or leads to political developments that prevent exports, such as sanctions.

For example, the post-election conflict in 2010 saw a reduction of around 2500 metric tons of cocoa exports from the Ivory Coast.

Lifestyle & Tastes

The demand for cocoa is linked to trends and lifestyle factors, particularly health and wellness, as chocolate-based products typically have a negative association with links to obesity.

Trends for healthy living may lower demand if they spread in large chocolate consumer countries, though customers may still seek healthier alternatives such as dark chocolate or organic options.

According to the CBI, the organic chocolate market is forecasted to grow by almost 7% between 2021 and 2028.

Fairtrade Legislations

The price of trading cocoa is influenced heavily by the cost of labour. Changes to rules and regulations from global associations such as Fairtrade International and sustainability practices implemented by processors such as Ecom and Olam aim to improve this.

In 2018, Fairtrade announced that it would increase the minimum price it pays for cocoa bean exports from $2000 per MT to $2400. This could lead to a higher supply if it encourages more cocoa farming, but it could also increase the price of the commodity.

Currency Value

The price of cocoa is typically listed in USD or GBP. Therefore, any influences on the value of these currencies can impact the price of the commodity.

For example, if the GBP gains against other currencies, cocoa will tend to become more expensive. The UK’s withdrawal from the European Union saw the GBP vs USD drop from $1.50 to $1.20.

In this same period, the Brexit agreement may have played a role in the price of cocoa futures dropping from $3200 per tonne in 2016 to $1769 per tonne recorded in June 2017.

Production Cycle

The full production cycle of cocoa from extraction to exportation can be as long as a few years. This includes transportation, quality checks, and storage. Due to this, it is not unusual to see supply shortages in relation to demand due to the lack of reactiveness.

On the other hand, there may also be periods of heavy supply which can reduce the price.

Infrastructure

Most cocoa is produced in developing countries where transport links can be poorly maintained and prone to disruptions.

Any challenges that disrupt infrastructure in supplier countries will slow the supply; on the other hand, new infrastructure products could have the opposite effect.

How To Trade Cocoa

Futures

Futures are the most popular method of trading cocoa.

A futures contract is a transactional agreement to buy or sell a specified amount of cocoa beans for an agreed price at a future date. The ICE, for example, offers cocoa futures with contract sizes of 10 metric tonnes and prices quoted in GBP.

While many commodities futures require the buyer to take physical delivery of the cocoa beans when the contract expires, cash-settled futures do not.

CFDs

Contracts for difference (CFDs) are a straightforward investment vehicle that allows retail traders to speculate on cocoa prices without owning the underlying asset. The profit or loss in a CFD is determined by the difference between the price of cocoa at the open and close of the contract, and traders can make use of leverage when trading.

Pepperstone, for instance, offers cocoa CFDs with leverage up to 1:10.

Shares

Traders who want to gain exposure to cocoa without trading it directly can invest in stocks of companies that produce, process or otherwise use the commodity. The share price of these companies may reflect the price of cocoa to some extent.

Cargill, for example, has been sourcing Cocoa beans and producing cocoa-based products in Ghana for over 40 years with an innovative processing plant launched in 2008.

Alternatively, you could consider purchasing shares of firms that are involved in chocolate manufacturing such as Cadbury and Nestle.

ETFs

Another option is exchange-traded funds. ETFs track a specific market segment by investing in several relevant assets – in this case, companies that produce cocoa or manufacture cocoa products.

Popular funds include the WisdomTree Cocoa ETF and the iPath Bloomberg Cocoa Subindex ETN.

ETFs focussing on the agriculture or food manufacturing sectors may also have significant exposure to cocoa.

How To Compare Cocoa Brokers

The main factors to consider when comparing cocoa brokers include:

Products

Choose a cocoa broker that offers your choice of cocoa futures, options, ETFs, CFDs or stocks.

Also check the amount of leverage available. UK-regulated firms typically cap leverage on soft commodities to 1:10.

Fees

The top cocoa brokers offer tight spreads and low fees.

Pepperstone, for example, offers spreads from 5 pips on its cocoa CFD with an average spread of 5.26. The contract size is 1 metric tonne.

Trading Platform

The platform is where you will analyse cocoa price history and plan trades. The best cocoa brokers offer a choice of platforms as well as mobile app compatibility.

Leading brokers may provide bespoke software, a selection of third-party platforms such as MetaTrader 4 or cTrader, or a combination of both.

Most traders look for an interface with custom charts, a range of timeframes, access to historical price data, technical indicators, and drawing tools. Algo trading or automated investment options such as copy trading are also popular.

Regulation

Oversight from a top-tier financial body such as the UK’s Financial Conduct Authority (FCA) is a good way to ensure the cocoa broker has tight security and offers customers protections, such as segregated client fund accounts and negative balance protection.

If you sign up with an overseas cocoa broker, check that it is overseen by a reputable regulator and research its track record.

Customer Service

Leading cocoa brokers offer accessible customer support with fast response times and several contact methods including telephone, live chat, or email. A good support hub or FAQ section can also be useful.

XTB, for example, provides local customer support for UK traders including a toll-free telephone number and live chat, available 24/5.

Trading Hours

Cocoa trading hours vary between markets and brokers.

ICE London, for instance, offers trading opportunities between 9:45am and 6:30pm (GMT).

Bottom Line On Cocoa Trading

Cocoa trading can be used to bet on chocolate demand, manage risk, and diversify portfolios. The best cocoa brokers offer a choice of trading products, including CFDs and futures. However, cocoa prices can be severely impacted by climate change and supply issues in major exporter countries such as Nigeria, Ghana, and the Ivory Coast. As a result, only risk what you can afford to lose.

FAQ

Article Sources

Cocoa Industry Facts (Statistica)

Global Cocoa Market Report (EMR Insights)

Cocoa Farming Practices (Fairtrade)

Cocoa European Market (CBI)

Cocoa Price Trends (Seeking Alpha)

Cocoa Market Forecasts (MMR)

Pepperstone Cocoa Trading Conditions