Known as a luxury commodity, cocoa has been an integral part of life's finer things from being a focal ingredient of varieties of global and cultural dishes to pharmaceuticals and sweet delights, it has cemented its reputation as an asset in both real-world applications and on the stock market.
It is generally produced in warmer climate regions especially in the rainforests near the equator. The biggest producers in the world today are: Ivory Coast (2.180 million tonnes), Ghana (811,000), Indonesia (780,000), Nigeria (350,000), Ecuador (284,000) and Cameroon (280,000).
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History of Cocoa
Cocoa is harvested from cacao trees native to the country of Mexico before being domesticated throughout the entire continent 5,300 years ago by the Olmecs—the oldest known Mesoamerican civilization. Pre-historic cultures continued the cultivation of cacao along the Yucatan stretching to the foothills of the Andes in the Amazon through the edge basins of South America more than 4,000 years ago.
Before the Spanish conquest, cocoa was even used as a currency in South and Central America and a luxury item in Spain during the Renaissance period.
Today, world production ranges from 5,000,000 - 5,500,000 metric tonnes annually.
Is Cocoa a Wise Investment?
Similar to other commodities, cocoa may produce both volatile prices and high yields depending on several factors that may affect its value. Here are some reasons why investors continuous to be bullish about the potential of this agricultural commodity:
- Dark chocolate is a known healthy food: Rich in antioxidants while lowering cholesterol and serving as extra protection against cancer, dark chocolate has now become a popular part of the diet of healthy-eating people—which is growing in numbers by the day. As more and more people prefer eating healthier foods, the same goes for a healthy demand for dark chocolates.
- Wealthier emerging market nations: Countries led by China and several more from Asia and Africa are quickly adopting Western dietary and culinary customs—many of which includes the use of cocoa as an ingredient. As these emerging economies get richer, the demand for more cocoa is also expected to soar.
- Western demand for chocolate continues to grow: As demand in Europe and North America shows no signs of slowing down—thanks to the growing perception of dark chocolate's health benefits—expect the value of this commodity to remain high and return with substantia yields every year.
Why Commodity Investment Is Good for Your Portfolio?
Commodities like precious metals and an agricultural commodity like cocoa help diversify one's portfolio because it is uncorrelated with other traditional financial assets. Aside from that, commodities also serve as a hedge against inflation.
Main Factors That May Affect the Price of Cocoa
After you invest on this commodity, it will greatly help if you take note of these main factors that may influence the price of cocoa in the market:
- Economic and political climate in top producing regions: Always refer to the top five country producers of cacao and be mindful of any issues whether economically or politically, that may arise in those countries. Also keep track of new regulations, policies and tariffs impacting agricultural commodity exportation.
- Climate change: Keep tab of any extreme weather conditions happening in the main regions where cacao plants are harvested. A Cacao tree requires both sunny and wet weather for the 5 years it require to mature. Droughts and extreme monsoon seasons can spell a bad harvest season for cacao trees.
- Changing consumer preferences: As long as consumers see dark chocolate as part of the healthy food diet, then the demand for cacao will continue to increase. Although consuming chocolates cause obesity, this can make many people stop eating chocolate. But, I'm sure you doubt anyone can just stop eating chocolates.
- British Pound currency value: Since cocoa is traded in British pounds, any changes in the currency will surely affect the trading price of cocoa.
How to Trade Cocoa?
Here are several ways to trade for this commodity in the market:
- ETNs: An easy way of buying cocoa-related equities is via an Exchange-traded notes (ETN). The two ETNs based on cocoa are the iPath Bloomberg Cocoa Sub-index ETN and the iPath Dow Jones-UBS Cocoa ETN. These financial instruments usually replicate the yields an investor would earn if they were to invest in futures.
- Futures: Trading futures allow an investor to directly purchase large quantities of a commodity at an agreed value to receive at a later period in the future. Examples of where futures can be traded are at the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).
- Stocks: Most would see this as the simplest way but with regards to cocoa, there is no company purely engaged in the production and selling of cocoa. There are of course, popular chocolate companies you can invest on such as Hershey Co, Lindt & Sprungli, Nestle S.A. and Modelez International just to name a few.
- CFD Trading: If you are using one of those social trading app such as eToro, then CFD trading is the easiest way to invest on cocoa. Contracts-for-Difference (CFD) provides the price of the CFD is the difference between the value of the commodity at the time of buying and its current price. This is a good option to get exposure on this commodity without having to purchase an underlying cocoa asset.
How to Start CFD Trading of Cocoa?
You simply need to choose a reliable broker or sign up on a CFD trading platform such as eToro to open an account and deposit your fund.
Investing on this commodity via the eToro's CFD trading platform doesn't require any storage fees since you won't be trading any physical assets.
How to Trade Cocoa on eToro?
- Create an account on eToro / Log-in your account for existing users.
- Click "Discover".
- Select "Commodities".
- Choose “COCOA”.
- Select BUY or SELL.
- Key in your desired amount to invest or the number of cocoa units you want to trade.
- Review and set the stop loss, leverage, and take profit parameters.
- Select “Open Trade”.
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Past performance is not an indication of future results. Trading history presented is less than 5 complete years and may not suffice as basis for investment decision.
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