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Cocoa Trading via Contracts For Difference
The cocoa plant was discovered in the 1600s, during the early exploration of the Americas and fast took Europe by storm as flavours and sweeteners were the predominate use for the cocoa beans.
Also known as Theobroma meaning ‘food of the gods’, the coca plant can be bitter, yet the most decadent crop the world knows today as chocolate (an $98.3 billion industry). The cocoa plant is an extremely useful commodity as many products are made from the single plant such as cocoa liquor, cocoa butter and cocoa powder.
Advantages for trading Cocoa with AvaTrade Australia
- Up to leverage on Cocoa CFD trading
- Trade on a 17.5 hours a day market
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Cocoa trading market
There are 3 main species of the cocoa plant form when the cocoa bean is harvested: Trinitario, Criollo and Forastero. The Forastero plant is a thick skinned robust plant that is the most popular variety of the three. The Criollo plant is highly sensitive to climate changes and the slightest alteration weather will affect its yield. Trinitario, is a combination of the two it’s popular for the delicate flower of the Criollo combined with the full-bodied nature of the Forastero.
The two main cocoa exchanges are the Intercontinental Exchange (ICE) and NYSE Liffe (part of the NYSE: Euronext group).
What influences cocoa prices
Climate would be the main factor that influences the production of the cocoa plant, which in turn will impact the cocoa price whether directly to the consumer or on the cocoa futures price and commodity trading markets. Drought and soil erosion will decrease farming yields as well as exposure to black pod disease.
The increase in demand of chocolate worldwide can increase prices, labour standards or any changes in this area of cultivation will impact the cocoa price. Production costs are relatively low however technology is ever-changing and can become a factor to be considered in the near future.
The top countries that produce and export cocoa beans are Ivory Coast that supplies over 30% of the world’s total cocoa, leading with more than 1,448,998 metric tons annually. Second is Ghana, with 835,466 that are grown in the West African country, and thirdly on the global metric of cocoa production is Indonesia with over 777,5000 metric tons produced annually.
Once cocoa beans have been garnered, fermented, dried and transported they are processed in to various components for commercial consumption in various industries such as soaps, cosmetics and confectionary. Country with the highest cocoa consumption globally is the Netherlands handling 13% of global grindings. Europe as a whole consumes 40% of the markets with a remaining 60% that is equally divided between Asia, the Americas and Africa.
Understanding cocoa trading
In this example the trader opens a long position of 10 units of 1 metric ton each at the market price of $2027. After a while the price reaches the level of $2039,5 and the trader closes the position. Value derived from this contract can be calculated by multiplying the position size by the price difference:
10 metric tons x (2039.5-2027) $/ton = $125
Cocoa Trading Main FAQs
- What influences the price of cocoa?
With roughly 60% of the world’s cocoa supply coming from the Ivory Coast and Ghana, the weather patterns in these countries can have a strong impact on the price of cocoa. Strong storms sometimes hit the area, which squeezes supply as farmers have difficulty bringing their cocoa crop to port. Demand for chocolate is also a large driver of cocoa prices and holidays typically see increased demand. One further issue is disease and pests, which can damage crops, leading to significant price spikes.
- How do I begin trading cocoa?
The first step is to decide if you will trade the actual cocoa futures or if you will use a derivate such as a CFD. Cocoa futures require a designated futures account, the margin required is fairly high, and the leverage used in futures makes trading them a risky venture. On the other hand CFD trading is far simpler, with a much smaller initial deposit required. There are many different brokers offering CFD trading, and the fees are also smaller. CFD trading of cocoa also allows the trader to set their leverage, which can make trading cocoa less of a risk.
- What is the best cocoa trading strategy?
There are a number of strategies that can be used to trade cocoa and the best one is the one the trader is most comfortable with and that allows them a comfortable profit. The strategy used to trade cocoa could be either fundamental or technical in nature, although technical trading strategies tend to be most successful. The best trading strategy will also change based on whether the cocoa market is ranging or trending.
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