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Cocoa Market and Futures Trading

cocoa trading secretsCocoa is the dried and partially fermented fatty seed of the cacao tree from which chocolate is made. In the United States, 'cocoa' often refers to cocoa powder, the dry powder made by grinding cocoa seeds and removing the cocoa butter from the dark, bitter cocoa solids. Cocoa is the world's smallest soft commodity market.

Cocoa Futures Contract Prices & Rates

Cocoa futures are traded on two primary exchanges:

  • Euronext.liffe in London
  • Intercontinental Exchange (ICE, formerly the New York Board of Trade) in New York.
  • The ICE cocoa futures contract is 10 metric tons (22,046 pounds).
  • The price is quoted in U.S. dollars per metric ton.
  • The minimum tick size is $1 per metric ton, equivalent to $10 per contract. Contract months are March, May, July, September and December

Fundamentals Analysis of Cocoa Futures

The cocoa tree requires the hot, rainy climate of a tropical rain forest so is generally grown in areas within 20 degrees north or south of the equator. It takes the cocoa tree about five years after planting to produce cocoa beans and about ten years to achieve peak production so changes in production capacity do not come quickly. Each pod of the cocoa tree produces 20-50 beans, and it takes about 400 beans to make one pound of chocolate. Most cocoa is harvested between October and January.

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Tips for Trading Cocoa

Cocoa trading is an international market and subject to much intermarket influence from the value of the currencies in which the contract is quoted to the supply/demand issues for other tropical commodities. After cocoa traders develop a foundation of knowledge of the production cycles of cocoa cultivation and processing, it is important to recognize how that knowledge needs to be combined with an understanding of economic factors that affect each aspect of getting the cocoa from jungle to package. Traders need to examine the relationship between worldwide economic conditions and cocoa prices and trends.

Because it can be difficult to get accurate, reliable regional cocoa production information such as the size and quality of the crop, cocoa futures can be a difficult market to trade. Political turmoil seems to be a way of life in the main cocoa producing areas so cocoa futures traders need to be sensitive to how those issues will affect the flow of cocoa supplies to the marketplace. Demand for cocoa is usually rather stable, so the supply situation is where the cocoa futures trader needs to focus.

Where to Find Cocoa Futures Trends and News

The most prominent source of cocoa trading information is probably the International Cocoa Organization, which publishes the ICCO daily price for cocoa that is used worldwide as a historical and trend reference. A number of other international resources include reports on cocoa trends, news and information. The Netherlands Cocoa Association gives production data for much of the world market. The UN Food & Agriculture Organization provides information on the impact that cocoa production and cultivation have on local markets and indigenous people of growing regions. Exchanges where cocoa futures are traded also offer resource material.

Cocoa Trading Strategy

Seasonal lows in cocoa prices tend to occur in January when the Bahia (Brazil) main crop becomes available and the market begins to anticipate declining consumer demand after the winter season ends. Consumer demand tends to rise going into late fall and early winter as processors accumulate supplies for the peak cocoa consuming period in the winter. However, seasonal tendencies in cocoa prices are usually not as strong as for some other commodities.

Cocoa Trading Supply

The largest cocoa producing countries are Cte dIvoire (Ivory Coast), which accounts for about 40 percent of world production; Ghana and Indonesia, about 15 percent each, and Nigeria and Brazil, about 5 percent each. The annual world production of cocoa ranges between 3 and 4 million metric tons.

Two main diseases are threats to cocoa production black pod disease in Africa and witchs broom in Brazil, a fungus that caused severe cocoa production problems in the 1990s. However, the biggest threat to consistent cocoa supplies tends to be political, social and labor issues, which frequently threaten to decrease or disrupt the supply of cocoa.

Cocoa Trading Demand

The leading cocoa bean importing nations are the Netherlands, United States and Germany, which account for more than half of world cocoa imports. The United States is the leading importer of cocoa products such as cocoa butter, liquor, and powder, accounting for 12% of world imports in recent years. The Netherlands and the United States each process about 15% of the world's annual cocoa production.

The largest cocoa consumers are Europe, North America, Japan and Singapore. The United States consumes about 13 percent of the world's cocoa; Germany, 9 per cent, and France and the UK, about 7 percent each. The cocoa butter extracted from the bean is used in a number of products, ranging from cosmetic to pharmaceuticals, but its main use is in the manufacture of chocolate candy.

U.S. cocoa imports come from Latin America; Europe imports from Africa, and Asia imports from Indonesia.

Cocoa Trading History

Cocoa apparently originated in South America and was combined with spices and served as a luxury drink in the Aztec empire of Montezuma. It was introduced into Central America by the ancient Mayas, and served as a luxury drink in the Aztec empire. Cocoa was brought back to Spain in the 16th century by the Conquistadores. For nearly a century, chocolate (usually made from cocoa, sugar, cinnamon and vanilla) became an exclusive drink of the Spanish Royal Court, until it gradually achieved a wider popularity in cocoa houses of major European cities.

The Dutch were the major influence on the world cocoa market as cocoa transformed from a beverage to a solid form They invented the process of pressing cocoa to make cocoa butter and cocoa powder, thus making possible the manufacture of chocolate. The dominance of the Dutch industry in cocoa trading and these inventions laid the foundation for the Dutch cocoa grindings industry and established their presence in the world cocoa trade. Swiss candy maker Daniel Peter's invention of milk chocolate in the 1860s further increased the attraction for chocolate and the demand for cocoa beans.

In 1925 the world's first cocoa bean futures contract was introduced at the New York Cocoa Exchange, which eventually became part of the New York Board of Trade and then ICE. Options on cocoa futures began trading in 1986.

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