Cocoa, also known as cocoa bean or cacao bean, is the dried and fermented seeds of the Theobroma cacao plant, from which cocoa butter and the nonfat cocoa powder are extracted. The plant was first domesticated about 5,300 years ago by the Mayo-Chinchipe people, who use the beverages for spiritual ceremonies.

But it was after the 15th century, when Spain introduced the plant in Europe, that cocoa consumption became popular. Today, various cocoa-derived products are enjoyed in different parts of the world, and more than 4 million tons of cocoa are consumed globally every year, making it a very important commodity. The world benchmark for the global cocoa market is the cocoa futures contract.

Cocoa futures trade on ICE and are the perfect choice for traders and hedgers who wish to get easy and cheap exposure to the cocoa market. Cocoa futures have a tick size of $10, and expire in the months of March, May, July, September, and December.

Cocoa Futures Contract Specifications
Symbol
CC
Exchange
ICE
Tick Size
$10
Point Value
$10
Contract Size
10 metric tons
Contract Months
March, May, July, September and December
Trading Hours (New York)
4:45 AM - 1:30 PM 04:45 - 13:30 // Pre open 8:00 PM 20:00
Trading Hours (London)
9:45 AM - 6:30 PM 09:45 - 18:30 // Pre open 1:00 AM 01:00
Trading Hours (Singapore)
5:45 PM - 2:30 AM 17:45 - 02:30 // 9:00 AM 09:00
Settlement
Physical Delivery
First Notice Day
Ten business days before the first business day of delivery month.
Last Trading Day
One business day before the last notice day.
Last Notice Day
Ten business days before the last business day of delivery month

Uses of Cocoa

Although the cocoa futures contract is the smallest in the soft commodity market, cocoa is used in a lot of things. These are the main uses of cocoa:

Cocoa powder: This is the nonfat solid remnant of the cocoa beans after the cocoa butter has been extracted. It is used in making cocoa-flavored drinks, candies, and desserts.

Cocoa butter: This is the fatty substance extracted from cocoa beans. It is mainly used in the chocolate industry but can also be used to make cosmetic products, such as soaps, makeup, and moisturizing cream.

Cocoa liquor: It is the semi-liquid extract from fresh cocoa beans that have not been dried or fermented. Consisting of roughly equal proportion of cocoa butter and cocoa solids, it is the chief ingredient in chocolate and confectionery products.

Cocoa husks: The husks of cocoa pods are used in making animal feed, fertilizer, and mulch.

The Largest Producers and Consumers of Cocoa

The cocoa plant grows in tropical regions, such as the West African rainforests and the Amazon regions. Ivory Coast, Ghana, Nigeria, and Cameroun are four top producers from West Africa, and they account for about two-thirds of the world’s cocoa production. Other top producers are Indonesia, Brazil, Ecuador, Mexico, Peru, and the Dominican Republic.

Chocolates and other cocoa-derived products are widely consumed in different parts of the world, especially in North America and Western Europe. The top importers of cocoa beans include the US, Germany, Netherlands, France, Belgium, the UK, Canada, Italy, Spain, and Poland. The commodity is mostly traded via futures contracts.

Why Trade Cocoa Futures Contracts?

Cocoa Futures Trading

Cocoa Futures Trading

There are many reasons to trade cocoa futures contracts. But the main factors that bring investors and traders to the cocoa market are the following:

Inflation hedge: Just like most other agricultural commodities, you can trade cocoa futures to hedge against inflation because it has an intrinsic value, which increases when inflation is on the rise. Moreover, with the central banks manipulating interest rates to boot their economies, paper currency is constantly losing value.

Diversifying portfolio: Astute investors diversify their investment portfolios. They have as many asset classes in their portfolio as they can lay their hands on. Diversifying into other asset classes helps to protect your investment from the effects of systemic events like market crashes. Cocoa futures provide a nice opportunity for portfolio diversification.

Speculating on cocoa price fluctuations: The bulk of the world’s cocoa supply comes from four West African countries, and those countries are prone to political crises, which often affects global supply. Apart from politics, changes in weather conditions in those countries can affect production. As a result, cocoa prices can fluctuate widely, creating opportunities for speculation, which can be very profitable if you master the art.

Cocoa Futures Trading Strategies

Cocoa Futures Trading Strategy

Cocoa Futures Trading Strategy

Finding trading strategies on the cocoa futures market could be a challenging task, but it’s not an impossible feat. For example, the above graph shows a cocoa futures trading strategy that we trade at the moment.

If you want to get inspiration to build your own trading strategies on a range of futures markets, we recommend that you have a look at our edge membership!

How to Play the Cocoa Market

If you want to play the cocoa market, it is best to trade cocoa futures contracts. The contract is offered on the London International Financial Futures and Options Exchange, which is a part of the Intercontinental Exchange (ICE). It also trades on the New York Mercantile Exchange (NYMEX) — a member of the Chicago Mercantile Exchange (CME) Group.

Through the CME Globex electronic platform, the cocoa contracts can be traded from any part of the world. A cocoa futures contract is equivalent to 10 metric tons of cocoa, and it normally expires in the months of March, May, July, September, and December. On the ICE, settlement of the contracts, at expiration, is by physical delivery of the commodity, while on the CME, the contract is settled with cash at expiration.

There are other ways you play the cocoa market, apart from trading the futures contracts, and they include cocoa options, cocoa ETFs, and cocoa CFDs. See how the compare!

Comparing cocoa futures contracts with other methods of trading cocoa

Basis Cocoa Futures Cocoa Options Cocoa ETFs Cocoa CFDs
What it is
Agreement to exchange the asset at expiration
A right to buy or sell the asset on or before the expiration
Instruments that track the price of coocoa but trade like stocks
Contract to exchange the difference in the price of the asset, from the time the trade is entered to the time it is closed
Where it trades
Commodity futures exchanges
Commodity exchanges
Stock exchanges
Online CFD brokers
Availability of leverage
Yes
Yes
Only with a margins brokerage account
Yes
Extra management cost
No
No
Yes
No
Expiration
Yes
Yes
No
No

Factors That Affect Cocoa Prices

There are so many factors that can affect the prices of cocoa, such as the following:

Weather conditions: Four West African countries account for about two-thirds of the global cocoa production. Since cocoa pods require the right mix of rainfall and sunshine to ripen, any adverse weather conditions in those countries can affect global cocoa production. Moreover, the region lacks adequate transportation infrastructure — excessive rain can cause a delay in transporting the commodity from production sites.

Local politics: Political crisis in those countries, especially Ivory Coast, which is, by far, the largest producer, can affect global supply and cause cocoa prices to rise.

Changes in consumer preferences: The demand for dark chocolate, which requires more cocoa to produce than milk chocolate, can affect the demand for cocoa — which in turn influences cocoa prices. Presently, more people are consuming dark chocolate because of the reported health benefits, but that can change in the future.

Key reports: Some cocoa market reports can significantly move the prices of cocoa futures contracts, and these are some of them:

  • Global Cocoa Market Report
  • ICCO Monthly Review
  • ICCO Annual Reports

Cocoa Futures Seasonality

Here is a graph over the seasonal effects on the cocoa futures market:

Source

Conclusion

Cocoa is used in making cocoa liquor, cocoa butter, and cocoa powder, which are used in the production of chocolate and chocolate-flavored products. The best way to play the cocoa market is by trading cocoa futures contracts on the ICE or CME.

You can find more info about futures market here.

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