Investing in Cocoa in the UK: Stocks, ETFs & Derivatives

Cocoa is a valuable agricultural commodity grown in the tropical and subtropical regions. The product is of high demand in part of the world due to it rich history as ingredients of several products ranging from beverages to pharmaceuticals and various cultural dishes.

Top cocoa companies

It popularity and rich cultural history as a commodity of life makes it a prominent asset in the stock market. Investors trade it through different financial instrument and today, we will explore the different means you can access the cocoa market and make the best of it trend.

History of cocoa

Cocoa native to the Americas and was a very valuable crop in early South American cultures. The term cocoa originates from the Nahuatl word “cacahuatl”.

It is estimated that the plant first grew in the basins of the Amazon and Orinoco rivers, although the Mayans and Aztecs eventually developed techniques to successfully cultivate cocoa.

The plant was considered a symbol of wealth for these civilizations and its beans were used as currency.

Cocoa is now considered a luxury commodity and is an essential ingredient in the preparation of delicious chocolate. From it, the best candies in the world are made, as well as many other products in various industries.

The term ‘cocoa' refers to the matured fruit and sometimes the tree it is growing. The seed of this fruit goes through a five stage a process, namely: fermentation, drying, roasting, crushing and grinding. After the first three phases, the cocoa beans are obtained and from the last two stages produces the cocoa powder.

The popularity of cocoa makes it a prominent asset in the agricultural commodities market. Unfortunately, supply, environmental and political issues can sometimes make it a quite volatile investment.

However, this volatility can create lucrative opportunities to enter the market at extreme times, generating profits by investing in cocoa.

Varieties of Cocoa

Cocoa beans are grown in three main varieties:

  • Criollo bean
  • Forastero bean
  • Trinitario bean

The Forastero cocoa beans is of high demand in the global market due to their very high quality. It makes about 80-90% of the world production of cocoa. For this reason, they are more expensive than the other 2 varieties of cocoa beans.

Why is Cocoa a valuable commodity?

Cocoa has become a highly coveted raw material thanks to the expansion of the demand for chocolate products worldwide, among other factors.

It is a versatile product with very beneficial applications. The fact that it is only grown in tropical and subtropical regions makes it valuable to the rest of the world. The limited growth area coupled with it high demand for production make the commodity one of value with stable an increasing price

On the other hand, cocoa is a substitute for coffee. Although unpopular, cocoa contains caffeine. This provide a stimulating effect that make its consumption very pleasant and similar to coffee intake. A serving of cocoa drink contains approximately half the caffeine of a cup of coffee.

In addition, cocoa contains about 10 times theobromine than caffeine. Theobromine has a positive effect on both our mood and brain alertness with fewer side effects than caffeine.

Other constituents of cocoa are the polyphenolic compounds most significantly flavanol. The flavanols form complexes with the saliva which give the bitter taste of cocoa. In addition, it enhances the beauty of the skin and prevent cardiovascular diseases

To understand the value of cocoa today, it is worth knowing the market segmentation by product type:

  • Processed cocoa beans
  • Organic cocoa beans
  • Cocoa solids
  • Cocoa paste
  • Cocoa butter
  • Cocoa powder
  • Liquid cocoa extract
  • Cocoa fiber
  • Cocoa-based drinks

The industrial applications of cocoa include:

  • Confectionery.
  • Food and beverages, including liquors.
  • Pharmacy.
  • Cosmetics.

As listed above, there are many products and applications of this crop. This helps to explain the interest in investing in cocoa through various direct and indirect assets.

Research and Markets predicts that the global cocoa market, estimated at 14.1 trillion dollars in 2022, will reach a size of 22.3 trillion dollars by 2030, with an annual growth of 5.8%.

It is estimated that China, the second largest economy in the world, will reach a market size of 4.9 trillion Dollars by 2030, with an annual growth rate of 9.5% during the same period.

Other notable geographic markets will be Japan, Canada, and Germany, which would grow at rates of 3.1%; 4.6% and 4.2%, respectively.

Cocoa main producing countries

The Cocoa crop is mostly grown in tropical areas around the equator, where the climatic conditions are suitable for the growth of cocoa trees.

About 75% of the world's cocoa beans come from 4 West African countries, namely: Ivory Coast, Ghana, Nigeria, and Cameroon. Ivory Coast and Ghana are, by far, the 2 largest cocoa producers and account for more than 50% of the global cocoa production.

According to Statista Review, in the 2022-2023 harvest, Ivory Coast (Côte d'Ivoire) produced approximately 2.23 million metric tons of cocoa beans.

Ghana, Nigeria, and Cameroon produced 750,000+, 280,000+, and 300,000+ metric tons respectively. Ecuador ranked third with 370,000+ metric tons of beans.

In the Latin American region, Brazil, Ecuador, Peru, Dominican Republic, and Colombia stand out. This complete the top-10 in that order. Together, they reached an aggregate production of 706,996 metric tons.

UK cocoa investment

Cocoa main consuming countries

We can affirm that the countries with the highest consumption of cocoa are countries with high consumption of chocolate, the main product derived from cocoa.

The Swiss Platform for Sustainable Cocoa indicates that a raw material grown in the south and consumed in the north. The following graph indicates the countries with the largest chocolate consumption in 2021:

UK cocoa derivatives

With a per capita consumption of 11.6 kgs., Switzerland led the world statistics in 2021. On average, a person in Switzerland consumed 11.6 times more chocolate per year than an average person in India.

The second and third place were occupied by the United States with 9.0 kgs., and Germany with 5.7 kgs. Completing the top-5, France and the United Kingdom with 3.6 and 3.0 kgs., respectively.

As expected, the most developed and largest economies concentrate the consumption of cocoa in the world.

Factors that affect the price of Cocoa

Like other agricultural products, the price of cocoa is set based on supply and demand, which can generate high levels of volatility.

Other factors that dramatically affect cocoa prices are:

  • Weather conditions: The climate can cause large fluctuations in supply, as cocoa cultivation requires specific conditions. Prolonged periods of drought, for example, decrease crop yields and hence supply reduces, consequently potential scarcity.
  • Labor costs: There is increasing pressure on West African countries to reduce the use of child labor on plantations, which was estimated at about 2 million children in a study published by Tulane University in 2015. This would end up increasing labor costs, making the final price of cocoa more expensive.
  • Pests and diseases in crops: Various pests and diseases, such as the swollen shoot virus transmitted by insects, can attack crops and decrease productivity. To combat diseases like this, infected trees must be cut down and new ones planted, which can take years to reach acceptable production.
  • Civil and Political disturbances in major Coca producing countries: The African continent has witnessed constant revolts and disturbances that can undoubtedly affect agricultural activity. Nigeria, the world's fifth largest producer, for example, has been facing an armed insurgency that causes constant instability.

The large fluctuations in the future price of cocoa over the last 16 years are evident. The price seems to be developing within an upward channel since the end of 2017.

Although the market experienced a secondary bearish trend between February 2020 and September 2022, it was broken in March 2023 and the price continues to rise strongly.

Cocoa is trading at 3.353 dollars per ton and seems to be heading to the top of the channel. Do you think it reach the highs of 2015, when it reached 3,678 dollars? Consider investing in the commodity.

Best ways to invest in cocoa

As said earlier, cocoa is a high demand commodity with limited supply due to growth conditions.This makes the prices of gold to appreciate have a potential to produce a high return. To invest in cocoa, there are 4 main financial instruments, they include:

1. Cocoa Futures

This type of contract involves a mandatory agreement between two parties for the purchase and sale of an asset at a future date at a predefined price.

It is a standardized derivative contract that is traded on various electronic exchanges, such as the New York Mercantile Exchange (NYMEX) or the Intercontinental Exchange (ICE).

Futures operate with margin (leverage), which is why their risk is greater than when trading a spot asset. In addition, you can avoid physical delivery through the contract rollover process.

Investing in cocoa through futures has 2 immense advantages:

  • These instruments are traded on a centralized and regulated exchange where transactions are crossed, so there is great transparency in price setting.
  • The commissions are very low compared to other instruments such as CFDs.

Among the main contracts we can mention are:

  • NYMEX: CJ.
  • ICE: CC.

👉 Best International Trading Brokers: Your Guide to Global Markets

2. CFDs on Cocoa

Contracts for Difference are derivatives that allow speculation with the commodity price, without acquiring the underlying asset.

They also operate with margin and their risk is quite high due to leverage. Large profits can be made, but potential losses increase in equal measure.

To invest in cocoa through CFDs, there are contracts for difference that operates as futures contracts and the CFDs that operate as shares of companies that participate in the cocoa value chain.

Unlike futures, CFDs are not traded on a single market. On the contrary, the broker who will counter all your operations.

On the other hand, the commissions that brokers charge for operating with cocoa assets are based on the spread, which can be high.

👉 Best UK brokers to trade CFDs

3. ETFs of Cocoa

The ETF or ‘Exchange Traded Fund‘ is a very similar group investment instrument to a mutual fund. ETFs invest in a specific group of assets, such as stocks, indices, and futures, in exchange for the payment of a management fee.

The ETF combines the characteristics of a stock with a mutual fund. It can be bought and sold through shares at any time.

The management fee can be higher or lower depending on the type of management (active or passive) required by the fund. This is a crucial aspect when selecting the ETF for you.

There are distributive ETFs that distribute dividends and others that only generate profits from their appreciation.

👉 Best UK brokers to buy ETFs

Best cocoa ETFs

  • iPath Bloomberg Cocoa Subindex Total Return ETN (NYSE: NIB).
  • WisdomTree Cocoa (LONDON: COCO)

4. How to buy cocoa stocks?

Spot shares represent an indirect investment instrument that gives us part of the share capital of a company, and with it, the right to receive a fraction of the potential profits that are generated.

In this case, you do not invest in cocoa as a ‘commodity' but in a company that participates in the value chain of this raw material.

With shares you can benefit from their appreciation in the stock market and/or possible dividends that are distributed.

Among the most important companies in the sector we can mention:

  • Nestlé (SWITZERLAND: NESN).
  • Mondelez International (NASDAQ: MDLZ).
  • Hershey (NYSE: HSY).
  • Chocoladefabriken Lindt & Spruengli AG N (SWITZERLAND: LISN).
  • Rocky Mountain Chocolate Factory (NASDAQ: RMCF).

We hope this article has allowed you to deepen your knowledge about cocoa and all the economic processes that surround it.

If you wish to start investing in cocoa, remember to make a good plan. Then, practice until you are able to generate consistent profits in demo and, finally, select a reliable broker that gives you access to the markets.

More about investing in commodities

FAQs about Cocoa Investment

What is Cocoa outlook this year?

Provided the demand for chocolate continues to rise, the demand for cocoa will consequently increase, also the price of the commodity. The most imperative consideration is the inflation rate when deciding whether cocoa is the right addition to your portfolio.

Is investing in Cocoa safe?

Like all investment, putting money in cocoa involves certain risks, such as market volatility, weather conditions, and government policies that affect the mentioned commodity’s market value.

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