From a luxury item to a staple part of modern life, cocoa remains a decadent product whose origins are exotic – even mysterious – for most end-users. Cocoa beans come from pods from trees (cocoa or cacao) which were originally grown in South America and were eventually cultivated on the African continent at the dawn of the nineteenth century. Grown in only a handful of countries across the globe, cocoa has an interesting and dynamic set of fundamentals which affect price. Although cocoa is traded on two exchanges globally – London and New York –contract details will focus on the New York, or Intercontinental Exchange, information.

Contract Size:10 metric tons

Price Quote & Tick Size: Dollars per metric ton; minimum price fluctuation is $1.00 per metric ton or $10.00 per contract

Contract Months: March, May, July, September, December

Trading Specs: Futures trade electronically only on the Intercontinental Exchange 0400 to 1400 ET.
Options floor trading hours are 0800 to 1300 ET.

Daily Price Limit: None

Trading Symbols: CC futures, CO options

http://futurespress.com/imgndoc/LAF/7-21-11%20cc.jpg
Past performance is not indicative of future results.
***chart courtesy of Gecko Software

Cocoa Facts

A huge percentage of global cocoa production resides within the African continent with the crown for production numbers falling to Ivory Coast (Cote D’Ivoire) at almost double its neighbor Ghana’s production. The total production numbers for the bean have grown through the last decade not due to increasing yields but rather increased production area.

Key producers are illustrated in the following table:
http://futurespress.com/imgndoc/LAF/7-21-11%20ccp.jpg

Trees begin to bear fruit when they are four or five years old and produce an average of twenty pods a year which spring from flowers pollinated by tiny flies, or midges. Once a pod ripens, it can contain anywhere from 20 to 60 beans embedded in pulp within an orange-colored rind. Pods are opened and the pulp and seeds are allowed to ferment or “sweat”, a process by which the pulp liquefies leaving the beans to be collected and then dried.

Pods can mature on the trees throughout the growing season from October to September but there is a general consensus that among producing nations there is a main crop and a mid-crop. However, since cocoa is a tropical crop, changes in the weather and the near year-round rainfall for some growers means that main and mid-crop harvest times can fluctuate.

Key supply and demand data is included in the following chart:

http://futurespress.com/imgndoc/laf/7-21-11%20ccw.jpg
Source: ICCO Quarterly Bulletin of Cocoa Statistics, Vol. XXXVII, No. 2, Cocoa year 2010/11
Published: 02-06-2011

Price highlights for this market include:

* In the early 1970s, cocoa prices were close to $500 per metric ton. Within that decade, prices would soar as consumption outpaced production.
* In 1974, African producers faced threat of severe drought on cocoa plantations which caused prices on markets to jump, especially in London.
* Frost in Brazil in July of 1975 damaged cocoa trees and sparked additional price rallies.
* Civil war in Ivory Coast (Cote d'Ivoire) in 2002 also cause a price spike to more than $2,400 per ton.
* After the tempestuous 2010 presidential election and challenge in ousting the incumbent president, civil strife and an export ban pushed prices up to $3,826 per ton.

Key terms for this market include:

Black Pod Disease – one of the most commonly referenced diseases that can affect cocoa trees. The pod rot is caused by Phytophthora, a fungus. It is quick to spread when there is a lot of rain or humidity, insufficient sunshine, and lower temperatures. Growers can try to control the fungus with copper-containing fungicides as well as prompt removal of infected pods.

Grindings – during production, the cocoa seeds from inside the pod are dried, cleaned, roasted, and de-shelled to make nibs. Nibs are ground to make pure chocolate. The grindings in news often refer to data on how much cocoa is being ground in certain areas, a potential indicator for chocolate stocks and manufacturing.

Flavanoids – according to the International Cocoa Organization (ICCO), the chocolate manufacturing industry has moved towards introducing more dark chocolate or high cocoa content chocolate. This is due to recent research which suggests some components of chocolate – flavanoids – could play a role in preventing some cardiovascular diseases and some cancers.

Key Uses

Cocoa is used primarily as a food product for human consumption. It is processed into chocolate and cocoa products used globally. Most cocoa activity within the last fifty years has involved “bulk” or “ordinary” cocoa – beans from the Trinitaro or Forastero trees. “Fine” or “flavor” beans generally come from Criollo trees. There are exceptions, but most beans will fall into those two categories and will be used in producing the following:

Cocoa Liquor – Beans are roasted before or after the shell is removed and the inside “nibs” are ground into a paste. Heat generation during this process causes the cocoa butter to melt.

Cocoa Butter and Cocoa Cakes– Finely ground liquor is fed into a hydraulic press to extract cocoa butter, leaving cakes which can contain anywhere from 6 to 24 percent of the initial butter. Cakes are ground or broken to be used further in chocolate manufacture. Cocoa butter can be added to soaps and cosmetics as well as food products.

Dutch Cocoa – Liquor or nibs can be treated with an alkali solution to produce a milder and darker cocoa.
Key Concerns

Cocoa trees are grown in areas within ten degrees to the north or south of the equator, a concentration which leaves little room for error within the supply chain. Among the issues for cocoa farmers, a few stand out as possible price movers.

Rainfall and Temperature – Cocoa trees are sensitive to soil water deficiency and dry spells that exceed three months can have a huge impact on yield. Trees respond best to relatively high temperatures with an ideal range between 18 to 32 degrees Celsius. Cocoa trees usually grow in the lower levels of a rainforest and shade is important for young trees.

Pests and Disease – Cocoa trees are susceptible to a host of issues including fungal diseases, insects, and rodents. Of these, the most common causes for concern include fungal diseases which cause the seed-bearing pod to rot – the oft mentioned black pod rot. Other commonly noted issues include swollen shoot virus, frosty pod rot, and cocoa pod borer. Pesticides and fungicides are the normal response to these issues. However, since many plantations are smallholdings in less developed nations, maintenance and care of trees can sometimes be cost-prohibitive.

Political and Social Issues – Since over one-third of global cocoa comes from Ivory Coast, the markets are ever watchful for any political or social unrest. Farmers and export workers have, in the past, blocked exports in protest of pay rates or conditions. A fractured or unsettled political division in a producing nation can also disrupt supply.