Why you can't ignore this commodity or the profit opportunities it holds

by , 18 November 2015

Commodities have had it hard over the past few years. The vast majority are struggling not to sink lower in price.

But there is an exception. And this is cocoa.

Cocoa is rising in value. And it looks like it has a lot further to rise.

Let's take a closer look…
 

The case for cocoa

 
Have a look at the chart below showing the performance of different commodities over the past three years…
 
 
Chart of commodities

 
As you can see, the only commodity on an upward trend is cocoa. The others are all down.
 
For the past three years, cocoa has rewarded investors with gains of around 10% per annum. Cocoa, along with cotton, are the only commodities making gains at the moment.
 
West Africa is the primary producing region for cocoa, accounting for over two-thirds of global production. The Ivory Coast grows a third of this alone.
 
The problem at the moment with this commodity is that rainfall is down this year. Less rain means lower yields from cocoa plants.
 
This is having a positive impact on the price of cocoa. And the fact that many cocoa producers lack money, they struggle to expand or improve yields by using good quality pesticides and fertilisers, Anthony Summers in Investment U explains.
 
The Ivory Coast has made some changes to deal with the problems facing its key industry. Cocoa farmers now have a minimum price that they’ll receive for their beans. This development has also had a positive impact on the price of cocoa beans.
 

The factors affecting the cocoa price

 
The supply side of the cocoa equation is seeing a fall. Stocks held in US and Europe are falling. This is happening whilst demand for the bean is forecast to rise 30% over the next five years.
 
With supply down and demand up, it means prices are going to rise. So how can you benefit from this?
 
In the US there is an exchange traded note (ETN) which tracks the cocoa price, the iPath Bloomberg Cocoa Sub-index Total Return ETN. So far this year, it’s up 13%.
 
You could also consider spread trading cocoa, but bear in mind the increased risks of trading a commodity.
 
So there you have it. Why you can’t ignore this commodity or the profit opportunities it holds.
 
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