Hot Commodities: Cocoa Futures Soaring

Cocoa, one of the most popular soft commodities, has been surging to start off 2012 after a rough end to last year. From their high point in March, cocoa futures endured a drop of more than 41% through the end of 2011. But this year is already looking up, with futures up approximately 7.6% through the first half of January. In fact, the only commodity to turn in a better performance over the two week period was orange juice. The big story for cocoa last year came from the Ivory Coast which suffered through a civil war that put significant pressures on the production from the world’s most significant cocoa nation. But this year seems to be a different story, and the start of a trend that may help traders rake in some healthy gains [see also Ultimate Guide To Cocoa Investing].

Cocoa: The Facts

The commodity cocoa, refers to cocoa beans, which are the dried seeds from the, Theobroma Cacao, or cocoa tree. The tree is native to the Americas, specifically the Southern Hemisphere, and has been a major part of the area’s history, though now the vast majority of the trees exist in West Africa. The most visible use of cocoa beans is present in candies and beverages, most often chocolate. But, cocoa bean can also be used to make cocoa butter, which is used for many pharmaceutical drugs, as it makes for a nice substance to encapsulate various drugs. Cocoa beans are also present in cosmetics, including various kinds of makeup, lotions, and even soaps [see also Invest Like Jim Rogers With These Three Agriculture Stocks].

From a production standpoint, no one even comes close to the Ivory Coast, as they nearly double the output of the second-placed Indonesia. Other notable big name producers are Ghana, Nigeria, and Cameroon. From a consumption standpoint, the country list is the polar opposite of the producing markets, featuring a who’s who of developed nations. The list of the top five global consumers are as follows: U.S., Germany, France, United Kingdom, and Russia. The real story here, lies in the emerging market countries that produce this important commodity, as a number of factors have combined to push cocoa higher on the year.

The most pressing issues comes from the Ivory Coast, who has seen a steep drop in recent production. “Cocoa arrivals at ports in top grower Ivory Coast are down nearly 4 percent to around 763,000 tonnes by Jan 15, exporters estimated on Monday, compared with 793,772 tonnes in the same period of the previous season as dry harmattan hits farm output” writes Ange Aboa. With cocoa exports taking a hit, there are two key factors that analysts are turning to: the lack of treatment of diseased plantations and dry weather. One agent even noted that the decline will continue in coming weeks because there are no more cocoa pods on trees. With demand for the commodity still high across the world, a lack of production could continue to inflate the price of cocoa, creating a juicy opportunity for traders to make a play [see also 12 High-Yielding Commodities For 2012].

Cocoa Investing

The speculation for high cocoa prices ranges from a few weeks, to all the way through March, meaning that now may be the perfect time to establish a short-term positions for the commodity. When it comes to cocoa investing, the options are not very wide, but that does not mean that they do not exist. The most direct way to take advantage of this temporary price spike comes from the March contract offered on the NYMEX at the CME Group. This is currently the most active contract and it also expires when analysts predict that cocoa may start to see some relief. Though futures require active monitoring, a position in one of these contracts could turn into a healthy short-term return for you portfolio [see also 2011′s Best Performing Commodity Was……Milk?].

Other options include an exchange traded product for those who are weary of direct futures investing. The Dow Jones-UBS Cocoa Total Return Sub-Index ETN (NIB) tracks front month futures on cocoa with an expense ratio of 0.75%. For those who are uncomfortable with futures investing, this ETN will alleviate the risks of outright owning a futures contract, while still offering direct exposure to the commodity. And finally, for those looking to make a more indirect play, The Hershey Company (HSY) relies heavily on cocoa for their chocolate production. Note that high cocoa prices could mean bad news for this stock so if you believe that cocoa will rise, HSY may potentially be a good short opportunity [see also Top 5 Commodity ETFs Of 2011].

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Disclosure: No positions at time of writing

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