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Cocoa trading involves one of the most common ingredients, used across the world for centuries. This commodity provides decent volatility and a huge range of instruments and approaches for trading and hedging. This 2022 cocoa trading guide explores the asset’s complex history, outlining ways to enter the game, instruments to trade, strategies and more. We have also produced a list of our top recommended brokers for cocoa trading below.
Top Cocoa Trading Brokers
What Is Cocoa Trading?
The cocoa bean is a soft commodity. Before understanding how it is traded on the financial markets, it is important to understand what this means. A soft commodity is a natural resource that is grown or produced, whereas a hard commodity needs to be extracted from the earth like gold or silver. These raw materials are used in the production of consumer goods.
Below are details of how cocoa trading has evolved over time but, in the modern era, it is predominately used in all chocolate-based products. The estimated value of the cocoa market today is $2 billion, which demonstrates just how many products rely on the cocoa bean. Because of this, the cost of the cocoa bean directly impacts the cost of all chocolate bars and other chocolate-based products globally.
The London cocoa exchange is based on African grown cocoa and the New York exchange is based on cocoa sourced from Asia.
History Of Cocoa Trading
- An Aztec document dating back to the 1540s represents the first evidence of cocoa beans being used as a currency with one tomato equalling 1 cocoa bean.
- The 1600s sees cocoa powder trading increase across Europe as more drinking products are produced.
- In 1795 steam engines are used to grind cocoa beans, which creates significant production efficiencies. As part of the industrial revolution, the cocoa trading industry booms and many cocoa companies and jobs are created.
- Coenraad Van Houten develops chocolate powder in 1828 by designing the cocoa press, which creates butter from squeezing roasted beans.
- In 1847 the first chocolate bar is created by Quaker Joseph Fry. Seven years later, Cadbury receives a royal warrant as the purveyor of chocolate to Queen Victoria. Many regard this as the first milestone in becoming one of the biggest and largest cocoa beans trading companies.
- Production moves to Africa, in countries such as Nigeria and Uganda. Cocoa trading increases throughout the 1800s and 1900s in line with growing chocolate consumption.
- In 1925, The New York Cocoa Exchange was established and the world’s first cocoa futures market was created.
- Cocoa reaches an all-time high of $5,379 per ton in July of 1977.
What Influences The Price Of Cocoa?
Many factors impact the price of cocoa, including:
As with most crops, the production of a high-quality yield is dependent on the conditions in which they are grown. Poor weather can affect the growth of cocoa plants significantly, which would reduce the market supply and thus increase cocoa trading prices.
Cocoa is priced in either GBP or USD, so any swings in the value of these currencies can impact the value of the cocoa bean.
Public Health Concerns
Historically, chocolate has been negatively associated with weight gain and lacking nutritional value. If demand decreases significantly, the price of cocoa could fall. In recent years, cocoa trading has benefited from the popularity of products with organic cocoa or dark chocolate products.
Cocoa plantations are predominately based in Africa and Asia, where governmental instability can occur. Political unrest can directly affect the production workforce and therefore impact the crop and its value.
Cocoa trading and production are reliant on low labour costs and any introduction of labour regulation or breach of human rights may influence the price. Over recent years, pressure has grown to ensure that cocoa production is in-line with Fairtrade policies
Cocoa Trading Price Right Now
How To Trade Cocoa
Futures are the most popular cocoa asset to trade and are available for cocoa beans, cocoa butter and cocoa powder. Futures are contracts where the trader agrees to buy a set amount of an asset (in this case cocoa) at a set price in the future. Despite being a global commodity, only a few exchanges offer cocoa futures, such as the New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). Cocoa trading contracts are also available on the CME Globex trading platform. Futures are popular due to their high liquidity and volatility.
Cocoa trading of options contracts is offered by both the CME and ICE. With these contracts, the trader pays a premium for the option (not the obligation) to exercise and purchase the asset in the future. Both exchanges offer options on their physically delivered cocoa futures contract. Options are either calls or puts, where the former are purchased if a trader believes the cocoa trading price will rise and vice versa.
Investors can also access the global cocoa market by trading shares of cocoa-producing companies such as Lindt and Nestle, both based in Switzerland. Access to shares of these companies is straightforward and available to access with most brokers. The share price of such companies has a strong association with the cocoa trading price of the commodity. Some of the largest cocoa traders such as Olam, Dietz and Ecom are not public, so, despite their heavy influence on cocoa trading, they are not available to invest in.
CFDs & Spread Betting
Traders can trade CFDs and get involved with spread betting, where gains can be made on the value of cocoa without owning the asset itself. Leverage trading can be used to increase position size and maximise returns, though losses are also amplified, so ensure an adequate risk strategy is in place.
Cocoa ETFs track the price of the commodity and are available for trading on the exchange in the same manner as stocks. There are two major cocoa ETFs available, iPath Dow Jones-UBS Cocoa ETN and iPath Bloomberg Cocoa Subindex ETN.
Pros Of Cocoa Trading
- Asset Availability – Available to trade with many brokers
- Range Of Tradable Instruments – Many different cocoa asset types can be traded, such as futures, options, CFDs and ETFs
- High Volatility – Cocoa is volatile by nature in both the short and the long term, which makes it an attractive proposition for both position and day traders
- Trade With Leverage – Investors can increase the sizes of their cocoa trades using leverage. This permits traders to execute larger positions than would be possible with their own funds. The rewards can be greater but so too can the risks
Cons Of Cocoa Trading
- Complex Assets – Some cocoa assets are not straightforward, which could deter newer investors
- Unavailability Of Key Players – Purchasing shares of large cocoa-producing companies can be a strong way into the market, however, many large cocoa trading companies are not publically available to invest in despite their heavy influence on the sector
- External Factor Influence – Cocoa commodity trading can be heavily influenced by external factors on crop supply, such as the weather and political unrest. Changes in the supply of cocoa beans directly affect production and thus the trading price.
Cocoa Trading Strategies
Since this commodity is a popular commodity to trade, strategies used for other asset classes can be employed for cocoa trading. The value of the bean can be volatile with large intraday swings, all whilst holding a long-term trend over months, these characteristics make it suitable for both day and position traders. The type of strategy chosen will depend on the trader’s preference, risk appetite and goals. Some key trading strategies are discussed below:
Support & Resistance
The support and resistance strategy requires analysis of cocoa price trading charts and economics to determine the trend, the support line and the resistance line. When the price nears the support line traders should buy, when the price nears the resistance line traders should sell.
Breakout strategies refer to monitoring the charts of cocoa and using support and resistance lines to identify the beginnings of a major trend that breaks through these lines. By doing this, traders will be able to capitalise on the low price of cocoa before a significant period of price growth.
As with all assets, doing your research before and during trading is essential. Since cocoa is a soft commodity and a crop, this is particularly important. Cocoa trading prices can be heavily influenced by external factors, so being wise to news stories that could impact the supply of the bean (and the price) to the global market is advised. Some examples include African droughts or even the Evergreen cargo ship blocking the Suez Canal.
How To Start Cocoa Trading
Choose A Cocoa Asset To Trade
There are many types of cocoa assets to trade, the most common of which are futures contracts. Cocoa assets have a varying level of complexity, with purchasing shares of cocoa trading companies the most straightforward. Whether you want to own the underlying asset or not will also determine which instrument you choose. It is essential that traders fully understand the asset before they invest, especially if leverage is involved.
Choose A Broker
Once you have chosen the asset you wish you trade, you need to choose a broker. Most brokers will offer cocoa assets, including eToro and Plus500. Some will specialise in particular asset types, for example, IG concentrates on leveraged CFDs and spread betting, whereas Plus500 provides a CFD trading platform with risk management tools.
Several other factors should be considered when choosing a broker. Some can charge large fees for depositing and withdrawing funds, which can reduce profits. It is also best practice to invest capital with a broker that is registered with a reputable financial authority like the FCA. This will provide traders with the assurance that their funds are protected. Additional features that brokers offer to help their customers include price alerts, APIs, multiple trading platforms and related news stories.
Open A Trading Account
Once you have chosen your cocoa trading broker, it is time to sign up for an account. Requirements to open an account will vary amongst brokers, so check for minimum deposit limits or identification checks. Most brokers offer a demo account, where no funds are required, allowing traders to practise before committing real capital. Some brokers will also offer deposit bonuses, so be sure to capitalise on those if available.
Develop A Risk Management Strategy
No trading is risk-free, so traders must develop and implement a risk management strategy, particularly if margin trading. Many brokers offer strong risk management advice, techniques and indicators to protect their customers. Stop losses and alerts can be placed on your trades to ensure you are aware of when your position and capital is at risk.
Enter The Market
Once all of the above is in place, you are ready to start cocoa trading. Ensure you follow your strategy and any fundamentals employed. If your analysis is indicating a fall in the cocoa price you should enter a short (sell) position and if an increase in price is anticipated you should enter a long (buy) position
It is important to monitor your position and be aware of factors that could influence the cocoa trading price, such as news stories, forecasts and sector-related information.
By monitoring the price of the cocoa instrument being traded you should identify your target price to close the position and capitalise on the market movements. Alternatively, you can implement limits or stops to close a position automatically once a specific price is hit.
Cocoa Trading Hours
Cocoa trading hours will depend on the market and the asset being traded. The ICE cocoa trading hours are as follows:
- London: 09:45 – 18:30 GMT
- New York: 04:45 – 13:30 GMT
- Singapore: 17:45 – 02:30 GMT
Final Word On Cocoa Trading
Cocoa trading is an attractive proposition to speculators of all types owing to its volatility both in the short and long term. Additionally, there is a wide range of cocoa instruments available and easily accessible with many brokers, which is attractive to investors that are looking to diversify their portfolios. Follow our step-by-step guide above to get started.
Why Is The Cocoa Trading Price So Volatile?
The price of cocoa is reliant on the supply to global producers of cocoa-based products. External influences that can affect the supply (and therefore price) include climate change, geopolitical instability, public perception and sustainability.
What Cocoa Trading Assets Are Available?
Cocoa trading assets include futures, options, CFDs, stocks and ETFs. Cocoa futures are the most common asset to trade and are generally considered the benchmark. However, all commodity assets offer portfolio diversification opportunities.
What Are The Best Brokers For Cocoa Trading?
The best brokers for cocoa trading are dependent on the instrument and strategy chosen. Brokers should be transparent regarding any fees, trading platforms, demo accounts and regulation by a reputable financial body.
Can I Purchase Shares Of Cocoa Trading Companies?
Yes, there are many cocoa trading companies across the globe listed on financial markets, such as Lindt and Nestle. However, some large companies are not listed on any exchange. This means that traders are unable to invest in these firms, despite their significant influence on the cocoa market.
Where Is Cocoa Grown?
Cocoa plantations are predominately based in African countries such as Nigeria and Uganda, as well as some located in Asia.