General presentation of cocoa and its uses:
Cocoa is a food product as well as a commodity traded on the stock markets. It is in fact an agricultural commodity that is one of the most traded food commodities worldwide.
Cocoa beans come from cocoa trees and are used in the food industry worldwide in a number of ways. They are in fact used for the production of chocolate after the cocoa beans have been ground. But other derived products are also manufactured from cocoa. This includes certain liqueurs, pastes, butter, cake and of course cocoa powder.
Currently, cocoa holds third position as one of the most traded commodities around the world.
More precisely, cocoa here relates to the powder obtained following the grinding of the cocoa beans which are the fruit of the cocoa tree. To better understand this market we can actually divide the cocoa industry into several distinct sectors as follows:
- The first part concerns the cocoa plantation operations as well as the harvest of the cocoa beans and their drying process. It is basically only the developing countries that are responsible for this primary industry.
- We then have the secondary phase which represents the transformation of the raw cocoa beans into cocoa fat or mass which is the semi-final product used by the chocolate industry. This procedure involves the beans going through certain processes including cleaning, drying, roasting, shelling and grinding. Sometimes these procedures take place directly at the production site but are mostly carried out by western multinational companies.
- Finally, the last part relates this time to the production of chocolate and other derived products that are then distributed to the final consumers. Of course, these secondary and third party activities are often completed in the consumer and developed countries.
Of course, it is necessary to bear in mind, between these stages, the transport industry and particularly the maritime transport which is predominantly used for transporting the cocoa.
The cocoa market in detail:
As you have undoubtedly understood, the cocoa market is an international market that functions mostly in the same way as for other commodities quoted on the financial stock markets.
Concerning the production of cocoa, this is mainly in Africa, more precisely the Ivory Coast and Ghana which between them produce over 60% of the global production of cocoa. This represents more than 4 billion tons per year in fact. Other African countries also produce cocoa as well as certain South American and Indonesian countries. We also know that over 80% of the worldwide cocoa production is from family plantations which generally have a surface area of less than 10 hectares.
Concerning the final part of this industry, the processing and consumption of cocoa is higher in Europe and on the American continent. A large part of the global cocoa market of the finished product is in fact controlled by a few western multinational companies.
It should also be remembered that the global market is strongly influenced by the financial markets given that the physical trade prices and futures contracts for cocoa are fixed by the London and New York stock markets.
How is cocoa quoted on the stock markets and how is it traded?
Trading in cocoa, as with other agricultural food commodities, is completed over the counter as well as on certain regulated stock markets.
These markets are notably the NYMEX stock market, or New York Mercantile Exchange, that has been owned since 2008 by the Chicago Mercantile Exchange, and the LIFFE, or London International Financial Futures and Options Exchange.
It is therefore in the form of contracts that cocoa is traded on the markets. On the NYMEX the size of a standard contract is 10 tons. For the stock market quotation, the price for one ton of cocoa is quoted in American dollars with a minimum fluctuation of $1.
Trading in cocoa can be completed through futures contracts, options or derived products such as CFDs.
Of course, it is the supply and demand of cocoa that determines the price of this agricultural commodity. It is these phenomena that also determine the major movements in the long term trend of this asset price. A strong demand and a low supply will therefore lead to a higher price for cocoa and, to the contrary, a weaker demand and a higher supply will normally cause a drop in the price of this agricultural commodity.