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Cocoa Markets Overview

Cocoa (or cacao) trees grow in a limited region approximately 20 degrees north and south of the equator. Around 70 percent of world production is grown in West Africa, with Ivory Coast and Ghana accounting for around 40 percent and 20 percent, respectively. Next is Indonesia with around 14 percent of world production. Cameroon, Nigeria, Brazil, and Ecuador are the next largest producers but with much smaller volumes.

Most cocoa is grown on small family farms. The farmers receive only a very small proportion of the international price of cocoa, and this has been falling in both absolute and real terms. Chocolate demand has been increasing steadily, helped by belief in its added health benefits. However, increasing attention is being paid in consuming countries to the poor conditions of the farmers and the use of child labor in cocoa farming. This has led to increasing sales of fair trade products.

Cocoa pods, which each contain 20 to 50 cocoa beans on average, are harvested from cocoa trees throughout the year and split open by hand (usually using a machete), and the beans are extracted along with the pulp. They are laid out for several days undergoing "sweating" when the pulp flows away. The beans are then taken to a facility where they are fermented and dried for four to seven days on trays or grates under the sun or artificial heat, after which the beans are trodden on and shuffled about (often with bare feet). Once dry, the beans can be shipped.

Beans are roasted and processed in factories to make final chocolate products. Once roasted, the beans are winnowed to remove their shells, leaving cocoa nibs.

These are alkalized before, during, or after roasting to determine the color and taste of the cocoa. The nibs are then milled to create cocoa liquor consisting of cocoa particles suspended in cocoa butter in about equal quantities. The liquor is pressed to extract the cocoa butter, leaving cocoa press cake, which is processed into cocoa powder. Cocoa butter is used to make chocolate. Cocoa powder is used in making numerous dessert and confection products.

Although cocoa beans are perishable, they can be held in storage for several years. Consequently, cocoa can be traded as a commodity for profit and change ownership many times over its life.

Cocoa production is currently around 3.5 million metric tons annually and has been steadily increasing. Demand is expected to continue to grow and reach 4.5 million metric tons by 2020. Cocoa prices have been volatile. They reached a 27-year low of $714 per ton in November 2001 mainly due to favorable weather conditions in the Ivory Coast, and a 32-year high of $3,775 per ton in March 2011. High prices from 2006 to 2011 resulted from production deficits and disruption caused by the disputed presidential election in the Ivory Coast in November 2010.

Cocoa beans, cocoa butter, and cocoa powder spot and futures contracts are traded on the NYSE Euronext Exchange in London and the Intercontinental Exchange (ICE) in New York. Cocoa futures and options on futures are traded on the NYSE Euronext Exchange (pounds sterling) and New York ICE (U.S. dollars). Cocoa futures trading volume on the ICE was 4.95 million metric tons in 2011, 750,000 metric tons more than production. Trading volumes on the NYSE Euronext market have traditionally been higher than on ICE, but the gap has been closing. ICE has been known as the market for speculative trading. It is unusual for a commodity to be traded in two major currencies.

NYSE Euronext[1] and ICE[2] contracts are standardized in 10-ton sizes. Standard contracts specify that future delivery can be made in any of the months of March, May, July, September, and December with 10 future delivery months (i.e., two years) available for trading. However, liquidity falls off sharply beyond delivery months within the first year. Contracts representing product from all country origins can be traded, some at a discount or a premium. Delivery for ICE contracts is at certain U.S. East Coast ports. Delivery for London International Financial Futures and Options Exchange (LIFFE) contracts is at certain specified northern European ports in the Netherlands, the United Kingdom, Germany, Belgium, and northern France. Options on futures are also available for months between the futures delivery months.

Prices are affected by various factors, including weather, crop disease, political instability, availability and cost of fertilizers and pesticides, or withholding of stocks by producers and speculation.

An illustration of the latter point came in August 2002 when London- based Armajaro Holdings, a hedge fund run and cofounded by Anthony Ward, bought three quarters of the 204,380 metric tons of cocoa delivered through the Euronext.liffe exchange under futures contracts. Cocoa prices soared to a 15-year high. In mid-2010, Armajaro purchased 241,000 tons of cocoa beans representing 7 percent of annual global cocoa production (enough to manufacture 5.3 billion quarter-pound chocolate bars). This was the largest single cocoa trade in 14 years and caused prices to rise to a 33-year high. Armajaro had closed its position by

Cocoa Prices, 1990-2013 (Daily Average)

Exhibit 18.1 Cocoa Prices, 1990-2013 (Daily Average)

Source: International Cocoa Organization Secretariat; World Bank.

the end of the year. Anthony Ward is based in London and started out as a motorcycle dispatch rider before becoming a commodities trader at a series of well- known trading companies specializing in cocoa and coffee. City of London traders are rumored to have nicknamed him "Chocfinger." He has amassed a considerable personal fortune and lives in a highly expensive area of London.

Exhibit 18.1 shows world cocoa prices from January 1990 to July 2013.

  • [1] NYSE Euronext contract summary:
  • [2] ICE contract summary:
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