Cocoa - How to invest in cocoa? [Guide]

Cocoa, an essential ingredient in chocolate desserts. In addition to providing us with sweets, it can also be used as an instrument for speculating and multiplying cash. It is a very variable raw material, the so-called a soft commodity whose price is subject to significant fluctuations. In this article you will learn how to invest in cocoa step by step.

Chart - Cocoa

Cocoa CFD Chart, Interval W1. Source: xNUMX XTB.

The use of cocoa

Cocoa beans are used to make cocoa powder and cocoa butter used in the production of chocolate, other desserts and sweets. Cocoa seeds are also used in the cosmetics industry.

Requirements and cultivation

The cocoa tree is a plant with specific cultivation requirements. It grows only in subtropical climates in South and Central America and in Africa.

The cultivation takes place both in large cocoa plantations and in small cocoa producers. Interestingly, most of the cocoa on the market comes from the millions of small farmers who grow their cocoa trees on small farms.

As we know many varieties of coffee, including the most important ones are robusta and arabica, cocoa is a plant that comes in various varieties. The three most important cocoa varieties are Stranger, Criollo and Trinity. The rarest and considered to be the best variety is Criollo. The fruit of this cocoa variety is believed to be less bitter and more aromatic. Only 10% of the chocolates produced in the world are made from this variety of cocoa. Most of the chocolates, as much as 80%, are made from the Forastero variety. This variety is more resistant to disease and less demanding to grow, making Forastero cocoa beans cheaper than these Criollo varieties.

The most important growing areas

The largest cocoa producer in the world is Ivory Coast accounting for 37% of global production in 2018. In 2018, Ivory Coast produced almost 2 million tonnes of this raw material. The next largest producers are Ghana (18% of world production) and Indonesia (11% of world production). The other major players in the market are Nigeria, Cameroon and Brazil.

It is believed that the progressive climate change may soon cause the areas where cocoa is grown so far to cease to meet the requirements of this plant, which will undoubtedly affect the prices of this raw material.

In 2018, the world's main cocoa producer, Côte d'Ivoire, significantly reduced its acreage. At the same time, the country was hit by drought. These two factors drove cocoa prices up almost 35% from January to May 2018. These types of situations create great conditions for investment and speculation for those interested in this market.

Investing in cocoa

Most of the world's cocoa trade takes place on the London and New York stock exchanges. In Europe, cocoa from West Africa is traded, and in the USA from Indonesia and South America. The West African variety of cocoa is believed to be of better quality, therefore the price of cocoa listed on the London Stock Exchange is higher than that on the New York Stock Exchange. Despite this difference, prices in America and Europe are highly correlated with each other.

Cocoa prices also depend on oil pricesas the cost of transportation significantly affects the final cost of this raw material. Most of the main processors' factories (Nestle, Mars, Cadbury) are located in Europe. Cocoa to Europe is mainly transported by sea.

Futures contracts

One cocoa futures contract is for 10 tons of cocoa. The contract prices are worth 1 ton of cocoa.

We have cocoa contracts maturing in March (H), May (K), July (N), September (U) and December (Z). The contract name is e.g. CCZ21. The letters and numbers of this abbreviation mean: cacao (CC), falling in December (Z) 2021 (21).

CFDs

CFDs available from Forex brokers is a good alternative for small investors. Thanks to them, we have the opportunity to invest small amounts in contracts using a leverage of 1:10. This enables more flexibility for our investment and greater profits (or potential losses).

How to buy cocoa - Brokers offering cocoa CFDs

Below is a list of offers from selected brokers offering the best conditions for cocoa trading (CFD).

Broker
End	Poland	Australia, Mauritius, Cyprus	Denmark
Cocoa symbol	COCOA	COCOA	COCOA
Min. Deposit	PLN 0 (recommended min. PLN 2000 or USD 500, EUR)	200 USD	0 PLN / 0 EUR / 0 USD
Min. Lot value	price * 10 USD	-	b / d
Commission	-	-	-
Platform	xStation	MT4/5, cTrader	SaxoTrader Pro Saxo Trader Go
	REVIEW	REVIEW	REVIEW
	CREATE AN ACCOUNT	CREATE AN ACCOUNT	CREATE AN ACCOUNT

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. From 72% to 89% of retail investor accounts record monetary losses as a result of trading CFDs. Think about whether you understand how CFDs work and whether you can afford the high risk of losing your money.

ETF

Another alternative is to invest in ETFs targeted specifically at the cocoa market or the agricultural commodity market.

[NIB] iPath Bloomberg Cocoa Subindex Total Return ETN

• • Issuer: Barclays Capital Inc
  • Annual fees: 0.70%

The fund buys cocoa contracts two to three months before expiry and sells them just before the expiry date. The great advantage of the fund is low management fees and small spreads.