There are three main types of cocoa plant from which cocoa beans are harvested: Criollo, Forastero and Trinitario. The Criollo plant has the highest sensitivity of the three varieties, and changes in climate can dramatically affect its yield. The Forastero, conversely, has a much thicker skin and so is much hardier, resulting in it being the most popular variety in the world. Lastly, the Trinitario is a hybrid of the other two varieties, attempting to combine the delicate flowers of the Criollo with the hardiness of the Forastero.
The beans from these plants are then divided into 3 deliverable grades (A, B and C) with A and B grades being deliverable at a premium and C being deliverable at par. Each commodity has its own ticker code to identify it in the futures market, and in the case of cocoa trading the ticker code is CC.
Cocoa has a number of special features as a commodity. It enjoys high levels of demand all across the globe, and yet has very concentrated and specific production sources. Cocoa plants can only flourish in the regions that lie within 20 degrees north or south of the Equator. Consequently, this means that in the right conditions demand can outstrip supply, raising prices. Furthermore, the production cycle works on a seasonal basis and the yield of each particular cocoa tree is comparatively low, producing only four pounds of cocoa each season. Despite this, cocoa has a number of applications in a range of markets, as discussed below.
Cocoa futures contracts are traded on two commodity exchanges: the Intercontinental Exchange (ICE) and NYSE Liffe (part of the NYSE: Euronext group). The latter has exchanges for determining prices in London, Amsterdam and Hamburg.
The main industries involved in cocoa trading are producers of chocolate and chocolate-related products, with around 3 billion pounds of chocolate being consumed each year in America. Chocolate itself is made by processing cocoa powder, and most of the large traders of Cocoa, such as the Archer-Daniels-Midland Company, do this themselves. They then sell on the processed material to confectioners who market the finished product to consumers. Cocoa is also used in the beauty products industry, as an ingredient in the manufacture of various lotions and creams.
Cocoa production is highest in the Ivory Coast, which when combined with Ghana and Indonesia accounts for approximately 70% of the global yield of cocoa. Other producing areas tend to be centred around Africa and South America, such as Brazil and Columbia. Malaysia and Indonesia are also prolific cocoa producers.
There are many factors that influence cocoa commodity prices. Factors that affect the prices of cocoa options on a future basis include natural variables such as the weather. Droughts and soil erosion can lower a farmer’s yield of cocoa considerably, as can disease such as black pod disease. Cocoa prices can quickly rise as a result, as the world demand for chocolate continues to increase. On an even more long term basis, any improvement in African work and labour standards, for example, could gradually and yet massively influence cocoa commodity prices. The production costs are currently quite low, but this could be subject to change in the future if conditions for workers are improved.
Ready to Start Trading Cocoa Commodities?
We recommend Plus500, who offer…
- Up to 1:50 leverage
- £20 free credit
- Smooth web-based, Windows, iPad & iPhone trading