- 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, this guide will discuss your investment opportunities and associated risks.
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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).
Not sure which investment instrument is best?
Ways to invest in cocoa
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.
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.
- A variety of stocks are available with exposure to cocoa and many other commodities.
- Shares are highly liquid, meaning you can get out of a position quickly, taking your funds with you.
- Dividend-paying companies can be a hedge against inflation and yield an income while you hold.
- Investing in stocks is easy, especially online with a broker.
- Cocoa supply can be unstable due to political instability in the regions where it is produced.
- Cocoa prices can be volatile, which can significantly influence your investment.
- Exposure to risk, unless you invest in a number of companies to diversify your holdings.
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.
- ETFs are diversified, investing in a basket of companies.
- ETFs are often seen as a less volatile investment option, particularly for beginners.
- You can trade ETFs like equities, so your investment is liquid.
- Lack of choice of cocoa-specific ETFs available compared to the choice of shares.
- Not ideal for active investors who want to pick shares since the basket of assets comprising an ETF is managed.
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.
- Significant profits are possible for investors that approach cocoa futures with a thorough understanding of the market.
- Being traded on margin, it’s possible to speculate on cocoa futures with a relatively small initial outlay.
- Susceptible to price swings. A poor investment may be pretty costly because volatility is inherently characteristic of the cocoa market.
- Losses can be substantial when using margin and leverage. Only experienced traders should speculate in this way.
- The future is an unknown. It’s impossible to predict everything that may impact the cocoa market (political instability, economic downturn, drought, and so on).
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Where to invest in cocoa
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First time investing?
How to invest in cocoa
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.
After you invest
What affects the price of cocoa
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.