For Easter, we wanted to give you insights on a fascinating industry as well as hints on how you could invest a part of your portfolio in cocoa.
Cocoa is derived from the dried and fermented seeds of a plant called the Theobroma Cacao, which means “Food of the gods” in Greek. Cocoa has a long history, as it was first cultivated by the Mayans 5000 years ago. The commodity was discovered by Spaniards when they travelled through Latin America in the 15th century, and it started to become popular in Europe in the 17th century.
Cocoa (or chocolate) is enjoyed in a thousand different ways all over the globe and has become a staple for gifting or traditional celebrations – such as Easter this weekend.
The global cocoa market is expected to grow at a CAGR of 3.4% between 2020 and 2026, to reach a market size of $13.52 billion by 2025, from $11 billion in 2019. The chocolate market is also expected to see an important growth, taking in $182 billion by 2025.
There are a variety of reasons to invest in cocoa or other type of commodities. First, there is a speculative dimension: with a unique concentration and production cycle very dependent on externalities, price may vary sharply depending on weather and politics.
Some traders believe that the demand for cocoa will soon rise. There are a couple reasons for this. Emerging markets are getting wealthier, and the demand for chocolate, a luxury product, may rise. Also, the health merits of dark chocolate have finally been recognized, making it far more popular for a wider part of the population.
Finally, investing in cocoa or other commodities is also a good way to diversify one’s portfolio because it is uncorrelated with other traditional financial assets.
There are 6 main factors influencing the price of cocoa, namely: supply, the climate, the production cycle, infrastructure and transportation, consumer preferences and the British pound.
Cocoa farm: Bean have not fallen yet !
Futures: futures are derivative financial contracts which obligate parties to transact at a specific time and price in the future. On the Intercontinental Exchange (ICE) or the New York Mercantile Exchange (NYMEX), contracts on cocoa are based on 10 metrics tons of the commodity.
These contracts have expirations for the months of March, May, July, September and December. (Links on platform) When investing in futures, you are betting that the value of your contract will go up as the commodity price goes up as well.
Cocoa ETNs: One of the simplest ways to buy some cocoa-related equities is through an Exchange-traded notes (ETN). There are only two ETN based on cocoa, which are the iPath Dow Jones-UBS Cocoa ETN and the iPath Bloomberg Cocoa Subindex ETN (links). These instrument tend to replicate the returns one would earn if he were to invest in cocoa futures.
Cocoa CFDs: Contracts-for-difference (CFD) can also be a great way to bet on cocoa prices. The value of a CFD is the difference between the price of the commodity at the time of purchase and the current price. It is a good alternative to get exposure to cocoa without having to own the underlying cocoa asset.
Cocoa stocks: This is a harder pick as there is no pure-play global cocoa company engaged in the production and sale of cocoa. You can nevertheless pick chocolate-producing companies, which have an important exposure to the commodity, such as:
You can also have a look at companies active in the importation and transformation of the commodity: