The Cocoa Market: how it works, and why it has become so relevant

The history of the cocoa business, and how it became a global commodity.

April 11, 2023

hEDGEpoint Global Markets

Cocoa is an ancient plant that comes from the cacao tree. This market gained relevance and became an esteemed commodity thanks to chocolate. In addition, cocoa is commonly used in beverages, cosmetics, and other products.

Nowadays, there are five countries that lead cocoa productions: Cote d’Ivoire, Ghana, Ecuador, Nigeria, and Cameroon. To better understand this market, let’s delve into the numbers, the production process, and the current economic scenario of this commodity.

Cocoa market in numbers

According to recent data from the International Cocoa Organization (ICCO), world cocoa production reached 5 million tons in 2022/23. The chocolate industry accounts for a large share of the cocoa market, with the United States, Germany, and Switzerland leading in per capita consumption. In 2020, the global chocolate industry’s revenue reached US$103 billion and is forecast to grow to US$130 billion by 2025.

Over the years, the production of cocoa in West Africa (which is the main producing region) has varied a lot, due to climatic problems, aging trees, poor agricultural practices, and disinvestment problems. In the Americas, production has increased over the years, but it represents only 1/4 of West African production.

Cocoa is particularly important for exporting countries. For example, Ghana is the world’s second largest producer with around 800 thousand tons per year. The cocoa contributes to 3.5% of Ghana’s GDP on average, while it employs around 18% of the working population.

The importance of cocoa for the economy of Côte d’Ivoire and Ghana is so great that, in many cases, the product is considered “brown gold.”

How does the cocoa production work?

Cocoa production can be explained in three distinct stages: Cultivation of cocoa trees, harvesting and breaking of the pods, and finally, fermentation and drying.

Cocoa Cultivation:

Cocoa is generally grown by small farmers on farms with an average size of two to four hectares. There are three main varieties of cocoa trees: Criollo, Forastero and Trinitario.

Cocoa trees usually grow under the protective shade of plants such as bananas, plantains, and palms. They can tolerate a wide range of soil types but are vulnerable to a lack of water. Cocoa productivity variations are more affected by rainfall than any other climatic factor.

Cacao trees can live up to 100 years but are most productive from about 25 to 30 years of age.

Harvesting and Breaking Pods:

Cocoa pods containing beans grow from the trunk and branches of the tree. Harvesting involves removing the mature pods from the trees and splitting them open to extract the moist grains.

The pods are suitable for harvesting for three to four weeks, after which the beans begin to germinate. Thus, it’s necessary to harvest at regular intervals, as the pods don’t all ripen at the same time.

Farmers open the pods to remove the kernels within a week to 10 days of harvesting. In one year, cacao trees generally flower and produce pods in two six-month cycles.

Fermenting and Drying:

Cocoa beans are normally fermented and dried on the farm, or in the farmer’s village. This process, which can take anywhere from three to seven days, is an essential step in enhancing the flavor of the cocoa beans. Poorly fermented cocoa beans develop little flavor, while overly fermented beans yield an acidic flavor.

That is, time is critically important in all stages of cocoa production and must be respected. Thus, there’s no way to rush any step to try to optimize productivity.

Once ready, cocoa is ready for export or for local processing. There are two associations that promote and regulate the physical cocoa trade: the Cocoa Merchants’ Association of America (CMAA) in the U.S., and the Federation of Cocoa Commerce (FCC) which is traditionally used in the rest of the world.

The commodity can be traded and delivered on two exchanges with different product specifications: ICE New York and ICE London. Contract sizes are 10 metric tons per lot. However, price quotes are in USD/metric ton for the first, and GBP/metric ton for the second.

What’s the current situation in the cocoa market?

Lately, the cocoa market has been under supply stress. This is due to the challenges on Main Crop harvest due to a stronger than expected Harmattan wind, the cold and dry wind blowing down South-West from the Sahara.

We’ve naturally seen a slower pace of exports from mid-January onwards, but volumes were lower than the five-year average from February on.

This tightening increased after discussions between the Cocoa & Coffee Council and international exporters, who had 20% of their export  rights expropriated for the benefit of local exporters.

This resulted in a standstill, and there was no cocoa made available by Côte d’Ivoire, which propelled the spreads and currency to where they are today. This resulted in a snowball effect as demand would naturally shift to other available origins. Ecuador’s differentials rose, for example, creating more tension due to possible defaults.

The market expects a global deficit in the range of -100,000 / -80,000 metric tons for the 22/23 crop year. Rainfall has increased in West Africa, but with El Niño looming this year, we’ll need a particularly good summer crop to repeat the 2.1 mt last season from Côte d’Ivoire.

But cocoa won’t be immune from erratic movements given the macroeconomic news that’s impacted all asset classes.

What’s the importance of risk management in this market?

Risk management plays a significant role in the cocoa market, as the main origins sell the product at a fixed price, while the second-hand market and/or destination markets trade with differentials.

Money managers and non-commercial players have contributed to today’s liquidity. The increasing use of systematic trading tools though, triggers move on the exchange that can be counterintuitive to fundamental supply and demand factors whilst decision making process becomes more difficult.

In a market with so many particularities and variations, it is essential to have a partner who offers specialized risk management products. hEDGEpoint is specialized in hedging, combining the knowledge of specialists with technology to always offer you the best experience in future operations.

Talk to a hEDGEpoint specialist.



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