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Investing in cocoa: A how-to guide
A guide to investing money in cocoa.
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Here we discuss how you can invest in cocoa and the risks that come with it.
3 ways to invest in cocoa
We run through the most common and accessible methods:
1. Invest in cocoa ETFs
Exchange-traded funds (ETFs) allow you to invest your money in a variety of assets rather than focusing your investments in one or two firms.
ETFs are a very accessible way of entering the market and function in a similar way to normal stocks. They are often seen as a more straightforward, and less risky, way of investing your money. Trusting your money to a collection of assets makes your investment more resilient to the individual fluctuations within the market.
If you are a newcomer to the investment world, ETFs may be something to consider. Here’s the one that’s exclusively focused on cocoa:
- iPath Bloomberg Cocoa Subindex Total Return ETN (NIB), which tracks the cocoa price via futures contracts.
Pros
- ETFs allow access to a larger and more diverse area of the cocoa industry at competitive prices.
- ETFs are often seen as a safer choice for investments, especially if you are a newcomer.
Cons
- By investing in the basket of assets that make up an ETF, you sacrifice some of the control you might have had by investing in a single company.
2. Purchase stock in cocoa companies
One rather common way of investing in a commodity is through stocks. Due to cocoa’s market popularity, there are a variety of companies for you to choose from. Some of the most recognizable names include:
- Nestle (NSRGY)
- Hershey (HSY)
- Mondelez International (MDLZ), the Kraft Foods spinoff that makes Chips Ahoy, Oreo, Cadbury and other treats
- Rocky Mountain Chocolate Factory (RMCF)
Even though companies like Nestle and Hershey are often recommended as solid investment choices, investing in stocks still requires some market knowledge. While ETFs can dilute strong performance from a few outstanding stocks, they are inherently diversified and may offer some protection against company-specific risks.
Pros
- An accessible and conventional way of entering the market.
- You can withdraw from the market at any time.
- A large selection of company stocks available to choose from.
Cons
- As a result of its demand and the areas it is sourced, cocoa is a politicized commodity that can be used as a bargaining chip during periods of political friction or negotiation. As a result of this, cocoa prices can periodically fluctuate violently, making a big impact on your investment.
3. Purchase cocoa futures
A more complex type of investment for cocoa growers, large buyers, advanced investors and speculators, buying futures allows you to directly buy large quantities of cocoa at an agreed price to receive at a later point in the future. Whether you make great returns on your investment or lose money depends heavily on the movements of the market.
Futures are direct but risky. They’re vulnerable to market fluctuations, so they rely heavily on the buyer’s knowledge. This type of investment can punish the buyer just as easily as rewarding them, so market newcomers may want to gain some experience first.
If you’re interested in trading futures contracts, check to see if your brokerage allows futures trading or choose one of the handful that does. You’ll probably also have to access a separate section of the trading platform, as futures and stocks are listed on separate exchanges.
Pros
- Futures give you direct ownership over an asset.
- Cocoa futures can reward buyers with solid returns if they approach them with strong market knowledge.
Cons
- Futures expire if they aren’t used within the agreed-upon period, making them worthless.
- Unpredictability and volatility are part of the nature of the market. Futures are very vulnerable to price fluctuations, and making a bad investment can cost a lot.
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Is cocoa a safe investment?
Cocoa’s global popularity makes it a massive commodity and a popular investment in the market. Even so, there are risks involved in any investment, cocoa included:
- Environmental conditions: Cocoa grows under specific weather conditions, and if these conditions shift suddenly, they can drastically affect crop yield and subsequently commodity supply. Additionally, environmental changes influence pollination and plant growth, once again impacting general supply.
- Political friction: As mentioned above, cocoa is sometimes used as a political bargaining chip to influence international decisions and conflicts. Many of the nations that serve as major cocoa suppliers have only recently found their place in the global market and rightly want to make the most of this highly desired commodity.
- Labor: For a long time, cocoa harvesting has been reliant on cheap or child labor. Recently there has been a massive shift towards fairer working conditions and salaries, which has increased production costs, meaning that cocoa prices have been at their highest since first transitioning from being a luxury to an everyday commodity. Regardless of prices, however, the shift towards better welfare conditions is a welcome change.
Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.
Bottom line
You can invest in cocoa by purchasing ETFs, stocks or futures. But before you commit, familiarize yourself with the risks of investing in this commodity, as cocoa is vulnerable to political and environmental shifts.
Compare your investing options across commodities and trading platforms before you buy.
Frequently asked questions
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
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