Cocoa Futures Trading Basics

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Contents

Cocoa Futures Trading Basics

Cocoa futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of cocoa (eg. 10 tonnes) at a predetermined price on a future delivery date.

Cocoa Futures Exchanges

You can trade Cocoa futures at NYSE Euronext (Euronext) and New York Mercantile Exchange (NYMEX).

Euronext Cocoa futures prices are quoted in pounds per metric ton and are traded in lot sizes of 10 tonnes .

NYMEX Cocoa futures are traded in units of 10 tonnes and contract prices are quoted in dollars per metric ton.

Exchange & Product Name Symbol Contract Size Initial Margin
Euronext Cocoa Futures
(Price Quotes)
C 10 tonnes
(Full Contract Spec)
GBP 1,350 (approx. 7%)
(Latest Margin Info)
NYMEX Cocoa Futures
(Price Quotes)
CJ 10 tonnes
(Full Contract Spec)
USD 2,700 (approx. 11%)
(Latest Margin Info)

Cocoa Futures Trading Basics

Consumers and producers of cocoa can manage cocoa price risk by purchasing and selling cocoa futures. Cocoa producers can employ a short hedge to lock in a selling price for the cocoa they produce while businesses that require cocoa can utilize a long hedge to secure a purchase price for the commodity they need.

Cocoa futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable cocoa price movement. Speculators buy cocoa futures when they believe that cocoa prices will go up. Conversely, they will sell cocoa futures when they think that cocoa prices will fall.

Learn More About Cocoa Futures & Options Trading

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How to trade cocoa

Once used as a currency and now one of the most popular ingredients in the world – cocoa is a soft commodity with an interesting history. Here, we discuss cocoa trading strategies and give you more insight into its production.

Cocoa trading basics

Cocoa, famously known for producing chocolate, is a highly traded industry. Used by ancient tribes as early as 600AD and exported to Europe from the year 1585, cocoa has a rich and interesting history. It now attracts traders almost as much as chocolate lovers, with the cocoa market reportedly worth more than $2.1 billion. 1 Here are few useful things to know before you start trading cocoa.

Top cocoa-producing countries

The top cocoa producers are West African countries like Cote d’Ivoire (Ivory Coast) and Ghana, as well as Latin American countries like Brazil and Ecuador. West Africa is responsible for the majority of cocoa production, worldwide. The top five cocoa-producing countries are: 2

Rank Top producers Cocoa production (in tonnes)
1 Ivory coast 1.45 million
2 Ghana 0.84 million
3 Indonesia 0.78 million
4 Nigeria 0.37 million
5 Cameroon 0.28 million

What are the different cocoa varieties?

There are three different cocoa varieties – Criollo, Forastero and Trinitario. Criollo is the rarest variety, accounting for only 5% of global production, while Forastero is the most common type of cocoa, accounting for roughly 80% of production. 3 Trinitario is a hybrid cocoa bean, which ranges between average and superior quality. The higher the quality of the bean, the better the taste of the cocoa and the higher the market price.

What moves the price of cocoa?

The price of cocoa is moved by factors that relate to supply and demand. Essentially, if more people want to buy cocoa than sell it, the price will rise because it is more sought-after (the ‘demand’ outstrips the ‘supply’). On the other hand, if supply is greater than demand, the price will fall.

The factors that impact cocoa prices include:

The climate

Like most crops, cocoa plantations are very sensitive to changing weather conditions. They require a warm climate and regular rainfall. Harsh weather conditions can have far-reaching consequences. If the crops can’t produce healthy beans, the cocoa supply will decrease, and prices will likely rise.

Labour issues

Top producers like Ghana and Indonesia often experience political issues related to labour, including wage wars and an underaged workforce. Cocoa production relies heavily on low labour costs; therefore, any new labour regulations can affect the price.

Geopolitics

Political uncertainty, corruption and unrest in cocoa-producing countries can disrupt production and supply chains, causing market volatility. This could again lead to higher cocoa prices across the globe.

Global health issues

For years, chocolate was considered bad for our health. However, more recent studies have proven that the antioxidants in dark chocolate can have a positive impact on our health. Depending on the public view of chocolate, as well as chocolate trends, the demand for cocoa may increase or decrease over the long term.

Crop diseases

Cocoa crops are plagued by various damaging plant diseases. This has a severe impact on the harvest, which leads to reduced output. For example, in 2020, the ‘Black Pod’ disease resulted in the loss of half a million tonnes of cocoa.

Currency movements

Cocoa is typically priced in British pounds and any ups and downs in the strength of GBP will impact the price of cocoa. A weak pound generally means that commodity prices drop, and the demand increases. If the pound strengthens against other currencies, cocoa becomes more expensive and demand decreases.

Additionally, if you’re planning on trading shares of cocoa-producing companies, it’s important to learn about the factors that affect share prices.

Cocoa trading strategies

Cocoa trading strategies depend on the trader’s knowledge of technical indicators, and their personal preference. Generally, traders could employ a range trading strategy, a breakout trading strategy or a fundamental trading strategy.

Range trading strategy

In a range trading strategy, a trader will identify levels of support and resistance in an asset’s price movements and seek to buy at levels of support and sell at levels of resistance. Range strategies work best in markets with lots of price movements, where there is not any particular long-term trend.

Breakout trading strategy

Breakout trading involves trying to spot the early stages of a trend and opening a position during this period. This enables traders to capitalise on profits once the trend moves above a level of resistance or, alternatively, once it breaks below a support level. In the context of cocoa trading, breakout traders will try to make a prediction about global supply for the upcoming year and open a position accordingly.

Fundamental trading strategy

Fundamental trading is a strategy in which traders depend heavily on the factors that affect levels of supply and demand. Fundamental traders will look at company-specific or region-specific events that could affect supply or demand for cocoa at the particular point in time. They will then base a trade on their findings.

Four steps to start trading cocoa

Choose a cocoa asset to trade

When you trade cocoa, it is likely that you will be trading futures. Futures are contracts in which you agree to exchange a set amount of the underlying commodity at a set price on a set date. These contracts are traded on futures exchanges. There are other ways that you can gain exposure to the cocoa market. Your choice will depend on whether you want to own the physical assets or not.

For example, shares of cocoa-producing companies are heavily influenced by the price of the commodity. Therefore, you could decide to trade or invest in companies such as Mondelez or known retailers such as Lindt.

Alternatively, you could use cocoa exchange-traded funds (ETFs), which can be used to trade cocoa benchmarks, or track a basket of cocoa stocks.

Decide how you want to trade

There are a range of different financial instruments you could use to trade cocoa, including futures, CFDs and spread bets.

Futures are the most popular way of trading cocoa, offering high liquidity and volatility. For traders, the disadvantage of trading futures includes an expectation that the physical commodity will be delivered – which they don’t want. Therefore, it’s necessary to ensure rollover arrangements are in place.

With CFD trading and spread betting, you can deal on changing prices of cocoa futures and options, without buying or selling the contract. CFD trading and spread betting use leverage, which means you only have to put up a small margin to gain exposure to the full value of the trade. This can magnify your potential profit – but also your potential loss. And, as you won’t ever take ownership of the underlying asset, you can go long or short – which means you can speculate on rising as well as falling cocoa prices.

Alternatively, you could choose to invest in the shares of cocoa companies or ETFs through our share dealing service.

Create your risk management strategy

Once you’ve familiarised yourself with the different ways to trade cocoa, you can choose which method best suits your trading strategy and risk appetite.

All trading involves risk, especially if you’re trading using leverage, which is why you need a risk management strategy to protect against unnecessary losses. There are ways in which you can minimise your risk, which includes attaching stops to your positions. Stops will close your trade at a certain point if the market moves against you, to prevent you losing more than you’re prepared to.

Open and monitor your first trade

Once you’ve completed these steps, it’s time to enter the market. When you trade cocoa with CFDs or spread bets, you can speculate on both rising and falling markets. If you think the price will rise, you would open a position to ‘buy’ cocoa, and if you think the price will decline, you open a position to ‘sell’. Your trading decision should be based on your analysis of the market and your trading strategy.

After you have opened your position – attaching the appropriate stops and limits – it is important to monitor your position’s progress and to keep up to date with anything that could impact the price of cocoa.

Cocoa trading hours

Location Cocoa exchange Trading hours*
New York London Cocoa 04:30 – 11:55 (New York time)
New York Cocoa 04:45 – 13:30 (New York time)
London London Cocoa 09:30 – 16:55 (UK time)
New York Cocoa 09:45 – 18:30 (UK time)
Singapore London Cocoa 17:30 – 02:30 (Singapore time)
New York Cocoa 17:45 – 02:30 (Singapore time)

*Hours are set by Intercontinental Exchange (ICE) and may vary. Hours will shift between March and November as the UK and US change to and from daylight savings on different days, while Singapore remains on Singapore Standard Time (UTC+8) all year round.

Cocoa trading in summary

  • The cocoa market is reportedly worth more than $2.1 billion
  • The top cocoa producers are West African and Latin American countries
  • The price of cocoa is moved by factors such as the climate, labour issues and geopolitics
  • The cocoa market offers the opportunity to make a profit on both rising and falling prices
  • Cocoa trading strategies include range trading, breakout trading and fundamental trading strategies
  • Cocoa trading hours are set by ICE and vary per region

Sources

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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Cocoa Trading: A High Risk High Return Commodity Worth Considering In 2020

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Last Updated on August 18, 2020

3 Reasons You Might Invest in Cocoa

Investors purchase agricultural commodities such as cocoa for a variety of reasons, but the following are most common:

  1. Speculation
  2. Bet on Growing Demand
  3. Portfolio Diversification

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.

  1. 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.
  2. 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.
  3. 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:

  1. Growing wealth in emerging markets could boost cocoa consumption.
  2. Global warming trends could damage the long-term production of cocoa trees and lead to supply shocks.
  3. 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:

  1. 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.
  2. Strength in the British pound could lower cocoa prices in some markets.
  3. 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.
  4. 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.

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:

Cocoa Trading Methods Compared

Leverage? Regulated Exchange? Cocoa Futures 5 N N Y N Y Y Cocoa Options 5 N N Y N Y Y Cocoa ETFs 2 N N N Y N Y Cocoa CFDs 3 N N N N Y Y

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.

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.

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:

Top 2 Cocoa ETFs

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.

Cocoa CFDs

One way to invest 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.

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Many regulated brokers worldwide 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.

One of the leading CFD brokers for trading agricultural commodities, like cocoa, is Plus 500. Here’s why:

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade cocoa and hundreds of other markets
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Start Trading at Plus500.com Important: Your capital is at risk. CFD services are suitable for experienced traders only.

One of the leading CFD brokers for trading agricultural commodity CFDs, like cocoa, is Plus 500. Here’s why:

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade cocoa and hundreds of other CFDs
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader 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.

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