How to Trade Cocoa

As well as being used to create one of the world's favourite treats, cocoa is also one of the most traded commodities on the planet. In this article, we will take a look at cocoa trading, examine what moves the commodity’s prices and demonstrate how to trade cocoa online.

Cocoa Trading: The Different Methods

As with any commodity, there are many ways for traders to gain exposure to cocoa, with each method coming with a list of its own advantages and disadvantages.

It is possible to invest in cocoa by buying the physical commodity, in the hope its price will increase and you can sell it for a profit in the future. However, there are a number of serious logistical issues involved with this method of investing in cocoa, including storage and transportation.

Consequently, cocoa trading mainly takes place using derivative products, which allow market participants to trade cocoa without taking possession of, or delivering, the physical commodity. In the following two sections, we will take a look at two popular methods of trading cocoa.

Cocoa Futures

Futures contracts represent an agreement between two parties to exchange an underlying asset on a predetermined date in the future at a fixed price. Nevertheless, traders can speculate on the price of cocoa by buying and selling cocoa futures without ever taking ownership of, or delivering, physical cocoa.

Cocoa futures are traded on the Intercontinental Exchange in London and the New York Mercantile Exchange. Contracts are standardised for both quantity and quality, meaning that every contract is the same, regardless of who is buying or selling it.

Futures contracts tend to have large contract sizes and, although they can be traded on margin, these large contract sizes can make futures potentially less appealing and less appropriate for many retail traders.

Furthermore, futures have expiry dates. This not only makes futures less ideal for long-term exposure, but also means that their value diminishes as the expiration date approaches.

Cocoa CFD Trading

Contracts for Difference (CFDs) represent an agreement between two parties to exchange the difference in the price of an underlying asset between the time the contract is opened and when it is closed.

As with futures, Cocoa CFD trading allows traders to trade both long and short, whilst also benefitting from leverage. However, cocoa CFDs do not have expiry dates, unless they are tracking cocoa futures. Nevertheless, cocoa CFDs are subject to swap fees if positions are held open overnight.

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What Affects Cocoa Prices?

Cocoa prices are influenced by global levels of supply and demand. There are a number of factors which can directly influence both of these things, which we will look at in the following sections.

Weather

As with any agricultural commodity, cocoa supply – and, consequently, price - can be affected by weather.

Unideal weather conditions can lead to a drop in production, which can cause prices to rise. On the other hand, great weather conditions can lead to a surge in production, which can cause prices to fall as the market becomes saturated.

Considering that around 70% of global cocoa production takes place in four West African countries - Ivory Coast, Ghana, Nigeria and Cameroon - weather conditions can have a large impact on cocoa prices. We don’t have to go too far back in time to see a real life example of this scenario.

In 2023, West African cocoa production was seriously hampered by excessive rainfall. The Ivory Coast, which alone accounts for around 45% of global production, experienced its wettest growing season this century. Consequently, poor weather conditions contributed to cocoa prices soaring in 2023.

Plant Disease

Like weather, plant disease is another risk which most agricultural commodities face during production. One of the most common diseases affecting cocoa is a fungus known as black pod, which is exacerbated by high rainfall.

Black pod was also a factor behind rising cocoa prices in 2023. In Ghana, 10% of the cocoa harvest in 2023 was lost due to black pod, with high inflation making the chemicals which can be used to fend off the disease too expensive for producers.

Health

As people become more health conscious, this could have an impact on demand or chocolate and, subsequently, cocoa prices.

Although excessive consumption of chocolate is widely accepted as being bad for our health, there is evidence that eating dark chocolate in moderation has some health benefits. Depending on how peoples’ opinion on chocolate develops over time, this may have either a positive or negative effect on cocoa prices in the future.

Furthermore, some governments, such as the UK, have introduced so called “sugar taxes” in recent years on sugary drinks. If the scope of these taxes are broadened to include chocolate in the future, this could also have a negative impact on cocoa prices. 

Political Instability

When a commodity’s production is concentrated in just a handful of countries, any disruption, or hint of a possible disruption, can cause volatility in prices.

Political instability in one such factor which can cause disruption to the supply of cocoa, and which has done so historically.

We already mentioned that 70% of the world’s cocoa production takes place in just four West African countries, but it’s just one of these countries which accounts for the majority of that figure. The Ivory Coast is responsible for around 45% of total global cocoa production.

In November 2010, the Ivory Coast held a presidential election and, after losing to his rival, the incumbent president, Laurent Gbagbo, refused to step down. This sparked a period of unrest and violence, which eventually ended with the capture and arrest of Gbagbo in April 2017.

As a result of the post-election turmoil and a subsequent cocoa export ban imposed by the president-elect, cocoa prices soared to a 30-year high on fears of disruption to global supply. This period of post-election instability is highlighted in red in the chart below.

How to Trade Cocoa CFDs

With a Trade.MT5 account from Admiral Markets, you can trade cocoa CFDs as well as CFDs on a number of other commodities. Follow these steps in order to start cocoa trading:

1. Register for a Trade.MT5 account.
2. Log in to the Dashboard.
3. Open the MetaTrader web trading terminal.
4. Search for cocoa CFDs and click the symbol in order to open a price chart.
5. Press ‘Create New Order’, enter a trade volume and click ‘Buy’ or ‘Sell’ to open your position.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.