Cocoa trading in 2023: Explained

The world's love affair with chocolate dates back centuries, but few give thought to the raw material that makes it possible: cocoa.

As a significant global commodity, cocoa fuels a multibillion-dollar industry and supports millions of livelihoods.

This article will delve into the intriguing world of cocoa trading, from understanding cocoa to the key players in production, and from the types of cocoa available to the nuanced factors affecting its price.

Whether you're an investor eyeing the cocoa market or a chocolate lover curious about this essential ingredient's journey from tree to treat, I've got it all explained for you here.

Understanding cocoa

Cocoa, often dubbed as the 'food of the gods,' is a fascinating commodity that holds a special place in global agriculture and commerce.

Extracted from the pods of the Theobroma cacao tree—a name that translates to "God food" in Greek—cocoa is a "soft" commodity. This term sets it apart from "hard" commodities like gold or oil, which are mined rather than grown.

The most common end product that springs to mind when discussing cocoa is, of course, chocolate. However, this versatile commodity serves multiple purposes. Cocoa beans are processed to produce not only chocolate but also cocoa powder, which is a staple in a variety of desserts and beverages.

Additionally, cocoa butter, another derivative, is a popular ingredient in cosmetics, skincare, and beauty products. It is renowned for its moisturising properties and is often found in lotions, creams, and lip balms.

When it comes to the trading sphere, cocoa is priced in U.S. Dollars per metric tonne. This standardised pricing makes it easier for traders and producers globally to understand and engage in the market.

The historical prices for this soft commodity have seen dramatic fluctuations. The highest recorded price for cocoa was $4,361.58 per metric tonne, reached in July 1977, during a time of significant economic volatility.

On the flip side, the lowest point it traded at was $211 per metric tonne in July 1965. These figures illustrate the cocoa market's susceptibility to a range of influencing factors, from geopolitical tension to climatic conditions.

List of top cocoa-producing countries

West Africa is undoubtedly the heavyweight in the global cocoa industry, contributing to approximately 70% of the world's supply. This region's predominance in cocoa production is vital for the chocolate industry, traders, and investors who depend on a steady supply of this key commodity.

Here's a complete list of countries and their respective annual cocoa production in tonnes:

1. Côte d'Ivoire - 2,200,000 tons
2. Ghana - 800,000 tons
3. Indonesia - 739,483 tons
4. Nigeria - 340,163 tons
5. Ecuador - 327,903 tons
6. Cameroon - 290,000 tons
7. Brazil - 269,731 tons
8. Sierra Leone - 193,156 tons
9. Peru - 160,289 tons
10. Dominican Republic - 77,681 tons

What are the different types of cocoa?

The cocoa world is rich and diverse, with different types of cocoa beans having their own unique characteristics, including flavour profiles, colour, and optimal uses. Here are the primary types of cocoa:

Forastero

Forastero beans are the most commonly grown and makeup about 80-85% of the world's cocoa supply. Originating from the Amazon basin, these beans are generally robust and have a strong, classic cocoa flavour. Forastero is primarily used in mass-produced chocolates and is cultivated mainly in Africa, and Central and South America.

Criollo

Known for their fine flavour and high quality, Criollo beans are rare and makeup only about 5% of the global cocoa market. Criollo cocoa is characterised by its complex flavour profiles with nuanced aromas such as floral, fruit, or nutty notes. Because of its premium quality, it is often used in gourmet and speciality chocolates. The Criollo variety is native to Central and South America, particularly Venezuela and parts of Mexico.

Trinitario

Trinitario is a hybrid between Forastero and Criollo and combines the robustness of Forastero with the nuanced flavours of Criollo. This type makes up approximately 10-15% of the world's cocoa and is grown in various regions, including the Caribbean and parts of Asia and Africa. Trinitario beans offer a variety of flavour profiles, depending on where they are grown and the specific hybrids involved.

Nacional

Nacional is a fine-flavoured cocoa variety native to Ecuador. While some consider it to be a subtype of Forastero, it has unique flavour characteristics that set it apart. Nacional is known for its floral and fruity notes and is highly valued in the speciality chocolate market.

CCN-51 (Colección Castro Naranjal)

This is a high-yielding clone created in Ecuador, designed for its disease resistance and productivity. Although it lacks the fine flavour characteristics of Criollo or Nacional, it is increasingly being grown due to its hardiness and yield.

What are the factors that affect the price of cocoa?

Understanding the price dynamics of cocoa is essential for both traders and stakeholders in the cocoa and chocolate industry. As a "soft" commodity, cocoa prices can be incredibly volatile, subject to a range of factors from weather patterns to geopolitical events. Here's a closer look at some of these crucial elements:

Weather and climate

Given that cocoa is an agricultural product, weather and climate are among the most impactful factors affecting its price. Adverse weather conditions, such as droughts, floods, or unseasonal temperature variations, can significantly affect cocoa harvests.

Cocoa trees require a humid tropical climate to thrive, and deviations from these conditions can lead to reduced yields and, consequently, higher prices.

For example, the El Niño weather phenomenon can bring about warmer ocean temperatures, affecting weather patterns and potentially leading to poor harvests.

Supply and demand

The laws of supply and demand heavily influence cocoa prices. Increased global demand, especially during festive seasons like Christmas and Easter when chocolate consumption is high, can drive prices up. On the other hand, a bumper crop in major cocoa-producing countries can increase supply, thereby lowering prices.

Geopolitical factors

Cocoa production is concentrated in specific geographical regions, particularly West Africa. Political instability, labour strikes, or changes in government policies in these regions can disrupt supply chains and drive up prices. Issues like tariffs and trade restrictions can also play a role.

Currency fluctuations

Since cocoa is primarily priced in U.S. dollars, fluctuations in currency exchange rates can impact its global price. A weaker dollar can make cocoa more expensive for buyers using other currencies, potentially affecting demand and prices.

Pests and diseases

Cocoa crops are susceptible to a range of pests and diseases, such as witches' broom, frosty pod, and black pod diseases. An outbreak can decimate cocoa yields within a short period, leading to supply constraints and price hikes.

Market Sentiment

Speculation and market sentiment can also sway cocoa prices. News about expected weather conditions, harvest forecasts, or political events can lead traders to buy or sell futures contracts, influencing the current market price.

Ethical and Sustainability Concerns

In recent years, ethical sourcing and sustainability have gained prominence in the cocoa industry. Consumer preferences for ethically produced, sustainable cocoa can impact market demand and, by extension, prices. Certifications like Fair Trade or Rainforest Alliance can command premium prices.

Economic Indicators

Global economic conditions, like inflation rates and consumer spending, can indirectly affect cocoa prices. In a booming economy, luxury spending which includes premium chocolate products, might increase, driving up cocoa demand and prices.

How to start trading cocoa?

To help streamline the process, I've created a quick, side-by-side guide. Here's what you need to know if you are interested in diving into the world of cocoa trading.

1. Market research - Study global trends, supply and demand, and major producers to understand the cocoa market.
2. Choose your trading platform - Pick a platform or broker that offers the type of cocoa asset you wish to trade.
3. Get educated - Familiarise yourself with trading terms, strategies, and tools through books, courses, and tutorials.
4. Create a trading plan - Outline your objectives, risk tolerance, and trading strategy in a written document.
5. Open an account - Register and fund an account on your chosen trading platform to get started.
6. Technical and fundamental analysis - Use technical indicators and market conditions to evaluate cocoa’s current and future prices.
7. Demo trading - Practise your trading skills and strategies using a demo account.
8. Place your first Trade - Execute your first buy or sell order using your trading platform's interface.
9. Monitor and adjust - Regularly review your open positions and adjust your strategy based on market changes.
10. Evaluate and learn - Keep a trading journal to assess your performance and refine future strategies.

Read up on this interesting article as well: 5 common trading mistakes to avoid

In summary

In this guide, I've walked you through various aspects of cocoa trading. From gaining a foundational understanding of cocoa to identifying the top cocoa-producing countries and understanding the factors that affect cocoa prices, I've aimed to provide you with a comprehensive view of this fascinating commodity market.

If you're eager to put what you've learned into practice, consider trading commodities on markets.com, a reputable commodity CFD trading platform. It offers a range of resources and tools to help you make informed trading decisions.

“When considering Commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.”