How to invest in cocoa from Canada

• Cocoa is a key ingredient in many popular consumer staples.
• Cocoa has a long history of being attached to currency.
• Investing in cocoa can be profitable and a way to diversify your portfolio.

Cocoa is a soft commodity that has been traded for hundreds of years. It is a vital input for the food industry and is widely used in pharmaceutical manufacturing.

However, constraints in its supply, environmental and political concerns, and changing consumer demand can make it a volatile asset.

If you want to invest in cocoa from Canada, this guide will discuss your investment opportunities and associated risks.

Benefits of investing in cocoa

Thanks to the world’s growing middle class, demand for cocoa-based products is rising. Cocoa producers are responding with increased output, enhanced quality, and dependability.

Cocoa is not traded as much as other soft commodities like soybeans and corn, meaning investors in the know-how have less competition.

Risks of investing in cocoa

Like any type of investment, investing in cocoa is not without risk and there are a number of considerations.

The price of cocoa can fluctuate based on supply shortages caused by adverse weather conditions, ranging from aridity and severe drought to flooding and insect infestation in the select locations where it is produced.

Health concerns may affect consumer demand for cocoa and derivative products (chocolate).

Cocoa investors may invest in the commodity via shares of companies that produce cocoa, ETFs, futures, options, and CFDs. More detail on each is provided below.

Shares

Several listed companies have exposure to cocoa production or the manufacturing of cocoa-based products. Some of the better-known names include the following companies.

• Nestle (SWX: NESN)
• Hershey (NYSE: HSY)
• Mondelez International (NASDAQ: MDLZ), a Kraft Foods spinoff that produces Chips Ahoy, Oreo, Cadbury, and other confections.
• Rocky Mountain Chocolate Manufacturing Company (NASDAQ: RMCF)

As ever when investing in shares, you are exposed to risk when your portfolio has a lack of diversification. Rather than investing in a single company, it is safer to invest in multiple with a strong financial track record.

ETFs

Exchange traded funds (ETFs) enable you to invest in a range of assets instead of just one or two companies. This builds in diversification and resilience to changes in the market that may profoundly impact a single company.

ETFs are extremely easy to invest in and operate similarly to traditional equities. They are often seen as a less complicated and hazardous method of investment.

Although there are many ETFs, cocoa-focussed ETFs are somewhat limited. An example of one cocoa ETF is the iPath Bloomberg Cocoa Subindex Total Return ETN (NIB).

If you are new to investing, you may want to consider the pros and cons of ETFs.

Futures and options

Futures and options are derivative trading instruments. They allow an investor to speculate on the price of cocoa at some point in the future. When that time comes, the investor must buy or sell and either take profit or make a loss (depending on the price).

However, futures and options are not designed for new investors, especially if you want to use them to speculate on cocoa.

Not every broker offers access to futures and options because of their more advanced nature.

Step 1: Choose an investment instrument

Choose how you would like to invest in cocoa (shares, ETFs, futures, options). Bear in mind that not every broker caters to every investment instrument.

Step 2: Choose a broker

To purchase cocoa shares, your broker must have access to the asset. You can compare brokers on Finty.

Features to consider include tradable instruments, market access (primarily of interest if you want to buy shares), brokerage fees or spread, currency conversion fees (if investing in foreign markets), and the trading experience.

If this is your first foray into investing, look for trading platforms with a demo so you can try it out before putting in your own money.

Should you wish to trade futures and options, expect the broker to enquire about your trading experience and income so they can decide how much leverage and margin to offer (if any).

Step 3: Decide how much to invest

You should never invest more than you can afford to lose, especially if your investment is speculative.

Step 4: Transfer funds

Most trading platforms support a number of funding methods. Bank transfers and debit cards are the most widely available way to deposit funds, but some brokers also accommodate alternative funding methods including credit cards. The time it takes for funds to clear varies based on the method used.

Note that your broker may have a minimum deposit requirement, although it is often so small as to be insignificant.

Step 5: Configure an order

A market order is the simplest way to invest in shares or ETFs. Most brokers also support trigger orders that automatically buy or sell at a set price.

Futures and options, if available on your broker, require careful research and order configuration.

Step 6: Place an order

When you are satisfied, submit your order for execution.

Due to its widespread appeal, cocoa is a significant commodity and a popular market investment.

• Cocoa grows under certain climatic conditions, and a rapid change in these variables may significantly impact crop productivity and, consequently, commodity supply.
• Two-thirds of the world's cocoa output originates from West Africa, with Ivory Coast being the largest producer. In recent years, the government has dealt with civil upheaval, mutinies, and outbreaks of Ebola, all of which may hinder output. In general, this area is used to geopolitical unpredictability.
• Cocoa is sometimes used as a political bargaining chip to influence international decisions and armed conflicts.
• Sustained improvements in working conditions and wages have boosted cocoa production costs, which has been reflected in cocoa prices.
• The largest producers of cocoa do not have world-class internal transportation infrastructure, exacerbating supply-side problems and causing price volatility.