Cocoa is one of the most dramatic markets in the commodity world. A couple of years ago prices hit records far above anything seen in decades, then fell back hard as conditions changed, a reminder that a crop grown in a narrow strip of the tropics can swing wildly on weather, disease and policy. With the main West African harvest season now under way, cocoa is back on the radar for traders who follow soft commodities. Here is what tends to move the price.
Where cocoa comes from
Cocoa beans grow on trees that thrive in hot, humid climates close to the equator. Production is unusually concentrated. Côte d’Ivoire and Ghana together supply around 60% of the world’s cocoa, with other important producers in West Africa, Latin America and Asia. That concentration is the single biggest reason cocoa is so volatile. When something goes wrong in one small region, the whole world feels it.
The crop is split into a main crop, harvested from around October to March, and a smaller mid-crop later in the year. Traders watch the start of the main crop closely because it sets the tone for supply over the following months.
How cocoa is traded
Cocoa futures trade on ICE in both London and New York. The London contract is priced in pounds per tonne and the New York contract in dollars per tonne. The two usually move together, but currency moves and differences in the beans each contract delivers can open gaps between them. Many retail traders access cocoa through spread bets or CFDs that track these futures.
Weather and disease
Weather is the first thing to watch. Cocoa trees need a balance of rain and sunshine. Too little rain during key growing months stresses the trees, while too much can encourage fungal disease. Dry, dusty Harmattan winds blowing from the Sahara between roughly December and March can damage developing pods. Weather patterns such as El Niño can shift rainfall across the region.
Disease is the second. Swollen shoot virus has damaged large numbers of trees in West Africa, and many farms have ageing trees that produce less than they once did. These structural problems do not resolve in a single season, which is why supply worries can linger.
Government policy and farm prices
In Côte d’Ivoire and Ghana, state bodies set the price farmers receive for their beans each season. Those farmgate prices affect how much farmers invest in fertiliser and new trees, and whether beans are smuggled across borders to wherever the price is higher. Announcements around the start of each season can therefore move the market. Rules on sustainability and deforestation in major importing regions such as the European Union are another factor, since they can affect which beans are allowed into the supply chain.
Demand and grindings
On the demand side, the key data are grindings, the quantity of beans processed into cocoa butter and powder. Regional grinding figures are published quarterly for Europe, North America and Asia, and traders treat them as a read on how much chocolate makers are buying. When prices soar, chocolate companies often shrink bar sizes, change recipes or raise prices, and demand can soften. When prices fall, the opposite can happen.
The dollar and wider markets
As with many commodities, the dollar matters. Our explainer on how dollar strength hits commodity prices shows why a firm dollar can weigh on prices quoted in dollars. With the dollar near its strongest in well over a year, that is worth bearing in mind. Speculative positioning also plays a part. When funds pile into or out of cocoa together, moves can be exaggerated in both directions.
Common beginner mistakes
The biggest mistake is underestimating volatility. Cocoa can move several per cent in a day, and contract sizes on futures are large, so position size matters enormously. The second is trading on a single weather headline without checking whether the market had already priced it. The third is ignoring liquidity. Cocoa is far thinner than oil or gold, and spreads can widen sharply in fast markets. If you have read our guide to what moves wheat prices, many of the same lessons apply.
Bringing it together
Cocoa is moved by a small number of countries, the weather over their farms, the health of their trees, the policies of their governments and the appetite of chocolate makers. Respect the volatility and keep your risk small.
If you would like an honest assessment of how prepared you are to trade fast-moving markets, our free trader assessment is a sensible place to start.
