Cocoa Commodity Trading, Soft Commodity Market GrowthWith cocoa futures in London hitting a 23 year high recently, cocoa commodity trading is an area of the commodities universe that may well be worth exploring further.
As a soft commodity traded both on Liffe, NYSE Euronext and the ICE Futures US platforms, world cocoa production is heavily weighted to West Africa with a growing share coming from Indonesia. The cocoa beans which have a significant demand in confectionery such as chocolate are derived from the cacao tree, where there are between 30 to 50 pink coloured cocoa beans (or seeds) to every cacao pod.
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Where is cocoa grown? While it is often considered a native of South America, about 70 per cent of cocoa is grown in West Africa, centred on Cote D’Ivoire (40%), Ghana and Sierra Leone. It seems a crucial factor to successful harvests for this crop is proximity to the Equator, with the majority grown in a band roughly 20 degrees to the north and south of the Equator.
If you are looking for exposure to cocoa commodity trading, you need to know that there are three types of cocoa bean, namely Criollo, Forastero and Trinitario. About 95% of global cocoa output is of the Forastero variety, but it is Criollo which is considered to produce the highest quality beans. Criollo is not as prevalent because it is not so resistant to disease, with the largest output being in Venezuela, leaving the bulk of world production to come from Forastero. Trinitario is a hybrid of the other two beans, aimed at avoiding the disadvantages of both beans. Harvesting of the cocoa beans After cutting the pods from the tree with a special curved knife, the pods are opened with a machete and the contents of pulp and seeds are left in piles on leaves in the open for a few days to sweat. Done properly this enhances the quality of the cocoa bean, which is originally very bitter. Fermented cocoa beans are dried by spreading them out on trays for exposure to the sun, a better approach likely to improve quality and flavour.
Global Cocoa production Overall, world cocoa production has grown over 130% in 30 years, reaching a record high of over 3.6 million metric tonnes in 2004. Just consider that in 1991, top producer Cote D’Ivoire produced just over 800,000 metric tonnes (mt), while in 2003 its output hit a record of around 1.55 million mt. Since then cocoa production in Coter D’Ivoire has been around the 1.4 million mt level, and likely to remain there in the foreseeable future.
Over the same period Ghana saw significant growth, from 0.3 million mt in 1991, cocoa output was about 0.7 million mt in 2007.
Indonesia represents a significant portion of the balance, and has seen sharp increases in output from around 0.175 million mt in 1991 to 0.575 million mt in 2007, and projecting over 0.9 million mt by 2014. And as global cocoa production has increased from 2.2 million tonnes in 1992 to 3.45 million tonnes in 2006, prices of this soft commodity have risen over the same period from $1,800 per tonne to $2,600 per tonne in 2008. As you consider cocoa commodity trading you will carry out some fundamental analysis on the consumption of the commodity as well as cocoa production.
World Cocoa Broadly speaking, Western Europe (1.2 million mt) is the largest consumer of cocoa, followed by North America (0.9 mt), then Asia (which has seen the fastest demand growth) and Oceania and Eastern Europe with comparable consumption levels (0.4 million mt), and then Latin America (0.2m mt) and Africa (0.1 m mt) with the lowest levels. All figures relate to 2005.
World cocoa prices are influenced by the link between stocks at crop year end and global cocoa grindings. So if this year’s supply is down, this leads to a fall in the stocks to grind ratio, and so will lead to an increase in global cocoa prices. Other agricultural commodities: Trading cocoa as a commodity
While cocoa commodity trading is probably one of the smaller soft commodities markets, it seems to have outperformed most other classes during the big correction during 2008. The demand and supply balance is relatively tight and so this augurs well for potential profits in the future. One area to consider when trading ICE cocoa futures contracts will be the deliverable growths, as this determines whether or not a premium is applied to the price. It is also possible to trade cocoa futures in London through LIFFE CONNECT, the electronic trading platform of Liffe, part of NYSE Euronext. You may also need to consider the potential impact of civil unrest in these key cocoa producing nations, as this can have a dramatic effect on the price of futures contracts. This is why commercial consumers as well as producers will hedge their positions, so that they do not suffer losses due to events beyond their control. Related Articles: For these reasons, cocoa commodity trading can be exciting but remember that while you can make big profits, especially if leveraged, it is equally possible to suffer loss of capital.
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