Risk Warning: Your Capital is at Risk.
Cocoa is traded through a various financial instruments. In this guide, we’ll explain the various instruments traders have to speculate on the price of cocoa, including which brokers offer related futures, stocks, and derivatives.
In a hurry? If you want to get started trading cocoa, here are brokers available in to consider:
Disclaimer: Availability subject to regulations.
Between 74-89% of retail investor accounts lose money when trading CFDs.
Contents
Why Do People Invest In Cocoa?
Traders purchase agricultural commodities such as cocoa for a variety of reasons, but the following are most common:
- Speculation
- Bet on Growing Demand
- Portfolio Diversification
Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.
Most cocoa production occurs in a few countries in Western Africa. Weather and local politics play a big role in creating and alleviating supply bottlenecks.
Cocoa prices can be very volatile. Traders looking to speculate on short-term bottlenecks in supply might see cocoa as an attractive commodity.
Is Cocoa a Bet on Growing Demand?
There are many reasons to expect cocoa demand to grow strongly in the years and decades ahead.
- Emerging market countries are getting wealthier and adopting Western dietary customs. Chocolate is a luxury item that could see great demand as these countries get richer.
- Dark chocolate is considered a health food. It is rich in antioxidants, lowers cholesterol and protects against cancers. As healthy eating habits become more prevalent worldwide, cocoa demand could grow sharply.
- Western taste for chocolate is growing. Whether it’s the perceived health benefits of dark chocolate or the sweet tooth of consumers, chocolate consumption in mature Western economies shows no signs of slowing down. Growth in demand in Europe and North America could push cocoa prices higher.
Cocoa To Diversify Your Portfolio
Commodities such as cocoa provide portfolio diversification to investors.
They generally have low correlation with other financial assets and offer protection during inflationary periods.
What Are The Risks Of Cocoa Trading?
Cocoa traders should also consider the risks involved in investing:
- Global concerns about obesity could curtail demand. Although dark chocolate has health benefits, it also has a very high fat content. Milk chocolate has both high amounts of sugar and fat.
- Strength in the British pound could lower cocoa prices in some markets.
- Oversupply of cocoa could put pressure on prices. If Western African cocoa-producing countries attain political stability and upgrade manufacturing facilities, cocoa production could increase and prices fall.
- Cocoa is a volatile commodity that could move lower without any specific catalyst.
Where Can You Trade Cocoa?
If you are looking to start trading cocoa and other agricultural commodities, here’s a list of regulated brokers available in to consider.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
Ways To Trade Cocoa
Cocoa investors have several ways to invest in the commodity including futures, options, ETFs, stocks and CFDs. More about each below:
Where Can I Trade Cocoa Futures?
The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), and the Intercontinental Exchange (ICE) offer a contract on cocoa that settles into 10 metric tons of the commodity.
The CME contract trades globally on the CME Globex electronic trading platform and has expiration months of March, May, July, September and December.
How Do Cocoa Futures Work?
Futures are a derivative instrument through which investors make leveraged bets on commodity prices.
If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are financially settled on the NYMEX, but physically settled on the ICE.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
What Are Cocoa Options on Futures?
Both the CME and ICE offer an options contract on cocoa futures. The CME contracts are options on the physically delivered cocoa futures contract that trades on the CME Europe exchange.
The ICE contracts are options on its physically delivered cocoa futures contract.
Options are a derivative instrument that employs leverage to invest in commodities. To find out how options work, see our Options Trading Guide. If you already know how to trade options, check out these Options Trading Strategies.
Options buyers pay a price known as a premium to purchase contracts.
Therefore, options traders must be right about the size and timing of the move in cocoa futures to profit from their trades.
What Are Cocoa ETFs?
These financial instruments trade as shares on exchanges in the same way that stocks do. There are two ETFs that invest in cocoa futures:
- iPath Dow Jones-UBS Cocoa ETN
- iPath Bloomberg Cocoa Subindex ETN
Can I Buy Cocoa Company Shares?
There are no pure-play global public companies engaged in the production and sale of cocoa.
Some chocolate manufacturers such as Hershey Co. (NYSE: HSY) invest in cocoa futures to offset their risk from higher cocoa prices.
While Hershey may be able to pass some cocoa price increases to consumers, ultimately higher prices hurt its profits.
How To Trade Cocoa CFDs
One way to trade in cocoa is through the use of a contract-for-difference (CFD) derivative instrument.
CFDs allow investors to speculate on the price of cocoa. The value of a CFD is the difference between the price of the shares at the time of purchase and the current price. Learn more about CFD in or CFD Trading Guide.
Many regulated brokers offer CFDs on cocoa. Customers deposit funds with the broker, which serve as margin.
The advantage of CFDs is that traders can have exposure to cocoa prices without having to purchase shares, ETFs, futures, or options.
IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.
Expert Opinions On Cocoa Trading
Experts see reasons for pessimism about cocoa prices in the short-term, but they also see a favorable long-term backdrop for the commodity.
Ideal weather conditions in Western Africa may lead to bumper crops for the commodity in the near-term.
…weather conditions are seen to be improving, fueling the selloff.
Wilfred Chong, Commodities Dealer, Phillip Futures
Do Any Experts Doubt Cocoa’s Future?
Other analysts point to waning consumer demand as the culprit for weak prices going forward.
However, despite his concern about the supply overhang on cocoa from the weather, Chong sees a reason to be optimistic about the long-term prospects for cocoa.
“There may be a rising number of health conscious individuals but there is also a growing popularity over health benefits of cacao and cocoa. Such trends take a much longer period to make a significant difference.“
Wilfred Chong, Commodities Dealer, Phillip Futures
Further Reading
To learn about cocoa’s bare-bones production process and how the plants are grown, see this Cocoa Commodity Guide.
If you want to compare other tradable agricultural commodities, see our guides on:
- How and where to trade wheat
- Types of derivatives for oat trading
- Regulated online brokers to trade sugar
Also see our guides on stock, CFD, and options brokers to find out which online brokers are available in .
