Part 1 of this article explored the dramatic surge in cocoa prices, with a record high of $12,261 per tonne reached in April 2024. This represented a staggering 65% increase since the start of the year. However prices have since tumbled, crashing by around 30% – currently hovering near the $8,000 mark. This volatility underscores the complex forces at play in the cocoa market.
But what exactly influences these price swings, and how can you take advantage of them?
To answer this question, Part 2 of this article will delve into the world of cocoa trading. We'll explore the key factors that drive cocoa prices and shed light on how you can trade this commodity.
Cocoa Trading Specifications
Cocoa prices are mostly traded through futures on the Intercontinental Exchange (ICE) through the contract symbol CC. Its price is expressed in US Dollar (USD) per metric ton for a contract size of 10 metric tons. The trading hours in London are 9:45 AM - 6:30 PM.
It is also possible to trade cocoa futures on another derivative marketplace - the CME Group. In that case, the trading hours are the same as the CME Globex, which runs from 5:00 PM to 4:00 PM from Sunday to Friday ,with a 1-hour break at 4:00 PM (Chicago Time).
What Factors Influence the Price of Cocoa?
Understanding the various factors that can influence cocoa prices is crucial if you want to get into cocoa trading, as by knowing the drivers that can influence the cocoa demand and supply relationship, you can gain insight into the dynamics of the market and potentially make better informed trading decisions.
● Ageing cocoa trees.
● Climate events.
● Cocoa diseases.
● Health and nutrition habits.
● Taste preferences.
● Cocoa’s uses beyond chocolate.
● Exchange rates, especially the American Dollar (USD).
● Geopolitical tensions.
● Economic growth.
● Other commodity’ prices.
● Speculation.
● Market sentiment.
3 Ways to Trade Cocoa Prices
Aspiring cocoa traders can access a variety of avenues to gain exposure to the market, each suited to individual profiles, risk appetites, objectives, and time horizons. Let's take a look at the most popular ones.
Futures on Cocoa
Futures contracts act as financial agreements that obligate both parties to buy or sell a specific amount of cocoa at a predetermined price on a future date. These contracts offer an opportunity for traders to speculate on cocoa prices and for professionals within the cocoa and chocolate industries to hedge against price risk.
Traders can speculate on the future price movements of cocoa by taking long (buy) or short (sell) positions in futures contracts with settlements typically made in cash, rather than physical delivery of the cocoa beans.
Professionals can use futures contracts for hedging purposes. For example, a cocoa producer can sell futures contracts to lock in a selling price for their upcoming crop. This ensures a predetermined revenue stream, regardless of potential price fluctuations in the future. Similarly, chocolate manufacturers can buy futures contracts to secure a fixed price for their cocoa needs, protecting themselves from potential price increases.
CFDs on Cocoa
Regulated CFD brokers like ActivTrades often offer many commodities to trade through Contracts For Difference (CFDs).
Contracts for Difference (CFDs) on cocoa offer an alternative way to speculate on the price movements of cocoa without the complexities of physically buying and holding the commodity. Unlike futures contracts, where there's an obligation to deliver the underlying asset (cocoa beans) upon contract expiration, CFDs focus solely on the price difference.
Traders can take long (buy) or short (sell) positions on CFDs based on their prediction of cocoa price movements (going up or going down). With CFDs, traders can use leverage, which means that they can control a larger position with a smaller initial investment. Leverage can therefore magnify potential profits, but also potential losses, which can be tricky for beginners.
Shares of Companies Involved in the Chocolate Industries
While futures contracts and CFDs on cocoa offer opportunities for active speculation, some investors may prefer a more passive or indirect approach.
In that case, they could gain exposure to the cocoa market by buying shares of chocolate processing or chocolate exporter companies. It is also possible to invest in ETFs with cocoa exposure.
Investing in publicly traded chocolate processing companies like Hershey's, Mondelez International, Nestlé, Lindt & Sprüngli, Barry Callebaut, and Cargill allows investors to potentially profit from the overall performance of the chocolate industry. As cocoa prices fluctuate, these companies' profitability and stock prices can be impacted depending on their margins.
ETFs offer a diversified basket of assets under a single holding. Some ETFs specifically target the agricultural sector or commodities like cocoa. It is also possible to invest in ETFs dedicated to chocolate processing companies. By investing in such ETFs, investors gain exposure to the cocoa market without focusing on individual companies.
*It is also possible to use CFDs on ETFs or CFDs on the stock prices of chocolate companies.
This two-part series has peeled back the layers of the cocoa market, revealing the intricate dance between supply, demand, and global forces that drive its price swings. We've explored various ways to gain exposure to this dynamic commodity, from futures contracts to company shares.
However, venturing into cocoa trading requires a prudent approach. So before you dive in, remember to conduct thorough research on what cocoa is and the implied risks of trading to be sure it fits your strategies and risk tolerance.
Many online brokers offer demo accounts, allowing you to test your skills and understanding in a simulated environment before risking real capital. How about you try it out now with ActivTrades?
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