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.
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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).
- Cocoa trading hours: 09:45 to 18:29 (GMT)
- Margin: 2.00%
- Spread: $8 over market
- Minimum trade size: 1
- Contract size: Metric Ton
- Ticker symbols: COCOA
- Price Quote: Dollars per metric tons
- Tick size: $1 per metric ton
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
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