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Cocoa Basic Fundamentals

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Basic Fundamentals

What Market Fundamentals Can Affect The Cocoa Futures?  

The cocoa tree needs a hot and rainy climate in order to thrive. The geographic production is very concentrated. Production is generally confined to areas not more than 20 degrees north or south of the equator. The cocoa tree takes about five years after planting to produce cocoa beans, and about ten years to achieve maximum production. Most cocoa is harvested between October and January.

When you are considering a trade in the cocoa market some of the basic fundamentals that you should consider are:

1. Côte d'Ivoire(Formerly Ivory Coast) Côte d'Ivoire is a country in West Africa. It was once a French colony. French settlers introduced cocoa to the area, and because of the favorable climate and soil conditions Côte d'Ivoire remains by far the largest cocoa producer in the world. It accounts for over 40% of global production.

In 2002, a civil war broke out. Although most of the fighting ended by law 2004, the country remains divided into a rebel-held north, and a government-held south. The civil war created tremendous price volatility in the cocoa market. The market remains very sensitive to any threat of political turmoil in Côte d'Ivoire.

2. FDA US food industry groups are currently lobbying the FDA to would allow the substitution of other vegetable fats for cocoa butter in chocolate products with the resulting products still being labeled as “Chocolate.” If they are successful, then cheaper and more widely products will start to compete with cocoa.

3. Disease Cocoa like any crop is susceptible to disease. The most serious threat to the African crops is black pod disease. Black pod disease is a fungal disease that thrives in wet and damp conditions caused by heavy rain. In 2007 black pod disease wiped out nearly 40% of Nigeria's cocoa production.

The most serious threat to South American crops is a fungus called “witch’s broom.” In the 1980s - 1990s this fungus devastated Brazil's cocoa crop. As a result, Brazil went from being the world's third-leading cocoa producer to being the 13th.

4. Demand Cocoa is mainly consumed in Europe, North America, Japan and Singapore. The Netherlands and the United States each process about 15% of the world's annual cocoa production. The Quarterly Cocoa Grind numbers measure of the amount of cocoa demand. A higher grind number means demand is increasing.

These are just some of the basic fundamentals to keep in mind when you are considering a trade in the cocoa market. The geographic concentration of cocoa production, and the political instability of the major producers makes it a very volatile market. Therefore, before opening up a commodity account to trade cocoa you should consult with a licensed commodity broker that follows the cocoa market to discuss investment strategies

Click here to contact a licensed commodity broker with experience in the cocoa market to discuss market opportunities and trade recommendations.


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