Cocoa as a Traded Commodity
Cocoa is classed as a soft future in the commodities market alongside coffee, cotton, sugar and other products.
Over 4 million tonnes of Cocoa is produced yearly making it one of the most valuable agricultural commodities in the world today. Africa is the biggest producer of Cocoa making up 68% of the world’s supply, led by the Ivory Coast, Ghana, Nigeria and Cameroon.
It is important to note the countries where this commodity is produced in the largest quantity, as any factor that affects production in these countries will impact the global supply of the product. For example, the price of cocoa soared during the crisis which followed the controversial presidential elections in Ivory Coast in 2011. During the crisis the prices jumped 15% from $2,900 to $3,699 per tonne (source).
Over 7.3 million tonnes of chocolate was consumed in 2015/2016 and with no slow down in sight, global demand for cocoa which is a major ingredient for chocolate is likely to increase. In the UK, chocolate must legally contain a minimum of 20% cocoa solids.
Fundamental Influences of Cocoa
Being an agricultural commodity, cocoa is subject to several fundamental influences. These are:
- Factors affecting its production such as weather patterns, drought, disease. Severe flooding or drought, as well as diseases such as the cocoa black pod disease, reduce the production yields. Reduced yields reduce supply, which causes prices to rise.
- Increased production will increase global supply and lower prices.
- Conflict in areas of production cause reduced supply and can have a severe upward impact on price.
How is Cocoa Traded?
Cocoa is traded as a futures contract on commodities exchanges (Intercontinental Exchange or ICE and NYSE Liffe, operated by Euronext) and electronic commodity trading platforms. This means that there are two sets of market trading hours on any trading day.
Cocoa is a bi-directional market; traders can profit from rising or falling prices. To profit from rising prices, the trader goes long or buys a cocoa contract. To profit from expected falling prices, the trader goes short or sells the contract.
What is the difference between trading Cocoa as a CFD vs Futures Contract?
With a CFD firm like London Capital Group, a trader can trade with a much smaller amount of capital in comparison to trading on a traditional futures exchange like the ICE exchange. With a single contract for a Cocoa future starting at 10 metric tonnes, there is a significant difference in the required capital costs. For example:
The minimum trade for US Cocoa Futures using a CFD broker LCG could be up to 20 times lower, with a minimum trade of 0.1 lot (contract), the smallest traded contract size would be 1 tonne vs 10 tonnes. Combined with the leverage offered by a CFD broker, the trader is only required to come up with a percentage of this amount as margin for the trade, 2% in the case of LCG.
So assuming a trader wants to go long on a single US Cocoa Future as a CFD, the trader would only need $41.56 to execute the minimum trade based on the price of US Cocoa being $2,078(30 January 2017 value on the ICE exchange). $2,078*1*.02=$41.56 (Price per tonne * minimum contract size * margin)
If a trader was to be approved to trade on the ICE futures exchange, the smallest single contract would cost $20,780,=$2,078*10. (Price per tonne * minimum contract size)
*The maintenance margin required by ICE for a Cocoa contract is $1,450 and an initial margin of $1,595, so using the margin offered by ICE the minimum would be $3,045.
Details of Cocoa Futures for ICE and for a CFD Broker (LCG)
London Capital Group (LCG) offers US Cocoa Futures contract for their clients with the following details:
|London Capital Group Trading Conditions|
|Market||Trading hours||Min spread||Min trade size|
|US Cocoa||09:45-18:30||6*||0.1 lot|
|Unit risk||Value of 1 pip/lot||Min Margin||Guaranteed Stop change|
*All information collected from https://www.lcg.com/uk/, see website for full terms and conditions. Your capital is at risk. Last updated on February 6, 2017.
US Cocoa Futures Contract Details on the ICE exchange
|Cocoa Futures: Market Specification|
|SYMBOL||CONTRACT SIZE||PRICE QUOTATION|
|CC||10 metric tons||Dollars per metric tons|
|CONTRACT LISTING||MINIMUM PRICE MOVEMENT||SETTLEMENT|
|March, May, July, September, December||$1.00/metric ton, equivalent to $10.00 per contract.||Physical Delivery|
|FIRST NOTICE DAY||LAST TRADING DAY||LAST TRADING DAY|
|Ten business days prior to first business day of delivery month.||Ten business days prior to last business day of delivery month||One business day prior to last notice day.|
|NEW YORK||4:45 AM – 1:30 PM04:45 – 13:30||8:00 PM20:00|
|LONDON||9:45 AM – 6:30 PM09:45 – 18:30||1:00 AM01:00|
|SINGAPORE||5:45 PM – 2:30 AM17:45 – 02:30||9:00 AM09:00|
Summary: Why Trade Cocoa Futures?
Cocoa is a highly volatile and liquid commodity with a combination of increasing global demand and with supply sensitive to political and weather conditions. Many regulated CFD brokers like LCG offer retail traders the opportunity to trade Cocoa without the institutional capital requirements of a futures exchange.