Investors purchase agricultural commodities such as cocoa for a variety of reasons, but the following are most common:
- Bet on Growing Demand
- Portfolio Diversification
We discuss these reasons below, but if you are interested in where and how to trade cocoa, we detail that further on in this guide – along with regulated brokers available in . Please see the table of contents for more info.
Can You Speculate on the Price of Cocoa?
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. Investors looking to speculate on short-term bottlenecks in supply might see cocoa as an attractive investment.
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.
Diversifying Your Portfolio
Commodities such as cocoa provide portfolio diversification to traders. They generally have low correlation with other financial assets and offer protection during inflationary periods.
Should I Invest in Cocoa?
Cocoa prices can be very volatile, so investing in the commodity could produce big gains or big losses.
Investing in cocoa can be more than just a speculative play on a supply shortage. An investment in cocoa is a way to diversify the assets in a portfolio away from financial products and into commodities.
A basket of commodities that includes cocoa, other soft commodities, metals and energy could mitigate overall portfolio risk and provide protection during times of inflation.
Investing in cocoa is also a way to profit from 3 long-term trends:
- Growing wealth in emerging markets could boost cocoa consumption.
- Global warming trends could damage the long-term production of cocoa trees and lead to supply shocks.
- Health-conscious consumers might increase their consumption of dark chocolate in the years ahead. Chocolate is unusual among health foods in that most people enjoy its taste.
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.
What Do the Experts Think About Cocoa?
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, Phillip Futures commodities dealer
Other analysts point to waning consumer demand as the culprit for weak prices going forward.
Whilst consumers are still looking to indulge, they are also increasingly concerned with eating better.
– Euromonitor analysts
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, Phillip Futures commodities dealer
How Can I Invest in Cocoa?
Cocoa traders have several ways to invest in the commodity:
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.
Futures are a derivative instrument through which traders 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.
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 employ leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of cocoa futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in cocoa futures to profit from their trades.
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
|iPath Dow Jones-UBS Cocoa ETN||iPath Bloomberg Cocoa Subindex ETN|
Shares of Cocoa Companies
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.
One way to trade in cocoa is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders 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.
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.
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.
Top Brokers Available in
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.90%-89.00% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.