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. In fact, cocoa beans were used as a common currency in many areas prior to the Spanish conquest. By the time the 17th century rolled around, the beans were in widespread use to make chocolate drinks, becoming one of the most popular beverages of the time. Now, cocoa is used all over the world to create chocolate, and other products such as cocoa butter. Many consume cocoa beans because of the health benefits associated with them, which are thought to have positive effects on cardiovascular health. As an investment, cocoa has become a popular commodity for investors looking to cash in on the sweet gains it can provide.
Physical Properties And Uses Of Cocoa
Cocoa trees require a warm climate to thrive, specifically within 20 degrees north or south of the equator. There are two different types of cocoa plants: Criollo and Forastero, with Criollo being the most sensitive to weather conditions, making it more difficult to grow and harvest properly. The cocoa trees take approximately five years to reach maturity, and each tree can produce roughly 2.2 pounds of cocoa. The cocoa beans themselves are about 3 cm thick with the center filled with a sweet pulp called mucilaginous. The seeds are typically white, though they turn a reddish brown color during the drying process [see also Commodity Investing: Physical vs. Futures].
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.
Cocoa Supply And Demand
Cocoa bean production is dominated by emerging and frontier markets, primarily countries in Africa. Cote d’Ivoire (The Ivory Coast), Indonesia, and Ghana are the top three producers worldwide, with the Ivory Coast nearly doubling the output of the second place Indonesia. Though Africa dominates cocoa production, holding roughly 70% of the market share collectively, Latin America also accounts for a substantial portion of output thanks to Brazil, Ecuador, and Colombia.
| Top Cocoa Bean Producers: 2008 | ||
| Rank | Area | Production (Int $1000) |
| 1 | Côte d’Ivoire | 1,055,146 |
| 2 | Indonesia | 610,568 |
| 3 | Ghana | 539,126 |
| 4 | Nigeria | 385,090 |
| 5 | Brazil | 155,599 |
| 6 | Cameroon | 144,433 |
| 7 | Ecuador | 72,627 |
| 8 | Togo | 61,614 |
| 9 | Papua New Guinea | 37,584 |
| 10 | Colombia | 34,457 |
| Source: Food And Agriculture Organization Of The United Nations | ||
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. Because the consumers and producers are in vastly different areas and economies, cocoa beans can see dramatic price changes from numerous factors [see also Why Commodities Belong In Your Portfolio].
Cocoa Price Drivers
As a global commodity, the price of cocoa is impacted by a number of factors, and is often subject to significant price swings in a relatively short period of time. The major price drivers of cocoa include:
- Weather Conditions: Like most agricultural commodities, cocoa is subject to adverse weather conditions. Any unforeseen extreme weather pattern can set off supply issues sending cocoa prices soaring.
- Geopolitical Tensions: With the major cocoa-producing nations being emerging and frontier markets, the supply of this crop can be easily bottlenecked by the combustible political situations that often characterize these nations.
- Climate Shifts: While most plants are pollinated by bees or butterflies, the cocoa flower is pollinated by midges, small flies, or by hand. Any kind of global climate shifts could drastically throw off the natural pollination of this plant. Also, as previously mentioned, cocoa trees require very specific environmental conditions for healthy growth, and a subtle shift in an area’s climate could make a huge difference in the industry.
- Labor: Unfortunately, numerous cocoa plants are harvested by child labor. In fact, in 2005 it was estimated that over 200,000 children were working in substandard conditions in cocoa fields. Because this crop relies heavily on cheap labor, any changes or new regulations on how the crop is produced, and who does it, could have a major impact on its price.
Investing in Cocoa
The investment thesis behind cocoa, is that this global commodity can be used to hedge against inflation as well as numerous other factors. Because the majority of the world’s cocoa supply is dependent on international markets, a cocoa investment can be a play on political relationships on some of these volatile nations. Below we outline numerous ways to add cocoa exposure to your portfolio:
Cocoa futures are traded on the Chicago Mercantile Exchange under the symbol CJ, with prices quoted in U.S. Dollars and Cents per pound. A single contract represents 10 metric tons of cocoa with a minimum fluctuation of $1.00 per ton. Trading is conducted in the March, May, July, September, and December cycle for the next 23 months. All contracts are subject to the rules and regulations of NYMEX.
Trading terminates on the day immediately preceding the first notice day of the corresponding trading month of Cocoa futures at ICE Futures U.S.
There is currently one ETF that offers exposure to cocoa. The iPath Dow Jones-UBS Cocoa Total Return Sub-IndexSM ETN (NIB) tracks a is a single-commodity sub-index currently consisting of one futures contract on the commodity of cocoa.
- iPath Dow Jones-UBS Cocoa Total Return Sub-IndexSM ETN (NIB)
Another way to gain exposure to this commodity is to invest in countries which have high production levels. Below are several country and region ETFs that focus on major cocoa producers:
- Market Vectors Indonesia Index ETF (IDX)
- iShares MSCI Brazil Index Fund (EWZ)
- Global X/InterBolsa FTSE Colombia 20 ETF (GXG)
- Market Vectors – Africa Index ETF (AFK)
Resources On Cocoa Investing:
[...] Among the many losers today, cocoa emerged as one of the worst performing commodities of the session. While the softs have been particularly volatile as of late, cocoa has been thrust back and forth based on various reports from the Ivory Coast, the world’s largest cocoa producer. One commodity expert noted that there has been a major uptick in the availability of cocoa coming from West Africa, and while bean production has been increasing for weeks, people are just now becoming fully aware of the massive production increase. With a now saturated supply, and not enough demand to keep up, cocoa futures fell 2% on the day down to the $2,972/ton level to close Thursday trading [see also Ultimate Guide To Cocoa Investing]. [...]
[...] The Ivory Coast is obviously an emerging market, putting cocoa prices at the mercy of its political woes as well as all of the growing pains associated with a developing nation. In fact, the nation saw an extra bout of turmoil after a hotly contested election saw incumbent Laurent Gbagbo refuse to give up power to Allassane Ouattara in 2010′s presidential race. Outattara, along with the backing of international organizations, ordered his fellow countrymen to halt all exports of the vital cocoa crop until Gbagbo left the political scene. This move looked to starve the incumbent of vital cash and also helped to push up world prices of the crop by nearly 10% in a matter of weeks before the ban was ultimately lifted in Spring of this year. Clearly, investors who enjoy trading these contracts should carefully monitor this country; staying up to date on the news of this nation can make for predictable and profitable trading in a commodity known to exhibit high daily swings [see also Ultimate Guide To Cocoa Investing]. [...]
[...] It was not a good year for iPath’s commodity ETNs, as the Cocoa ETN comes in as the second worst performer. This result came as a surprise as it seemed that the soft commodity was set for a good year. The majority of the world’s cocoa is produced in The Ivory Coast, a frontier market that is chalk-full of risk. This year, The Ivory Coast was dealing with a violent civil war and an extremely unstable economy. Normally, this result would yield a jump in cocoa prices as production falls off and demands are not met. But it seems that the volatility was just too much for NIB to overcome, as this ETN was one of the worst commodity performers [see also Ultimate Guide To Cocoa Investing]. [...]
[...] 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]. [...]