Cocoa Fundamentals – Futures Guide

Written by Author

On July 15, 2020
Cocoa Fundamentals

Cocoa Fundamentals

Cocoa Fundamentals and the price of cocoa are influenced by a number of fundamental factors that affect demand and supply.


  • climate
  • political instability
  • pestilence
  • regulations
  • and the economic strength of consuming countries.

Cocoa is grown in tropical climates found in Africa, South and Central America, and Southeast Asia.

Cocoa Producers

cocoa producers


The Ivory Coast is by far the major producer of cocoa in the world followed by Ghana, Indonesia, and Brazil. Approximately 75% of the world cocoa crops are harvested between October and February. A second harvest, referred to as the mid-crop, takes place from May to August.

The cocoa tree thrives in humid, warm temperatures of 30 degrees C (90F) and requires minimum temperatures of 15 degrees C (45F). Temperatures below 10 degrees C. can cause significant damage to the tree. Soil moisture is also critical, so rainfall needs to be plentiful and constant throughout the year. Dry weather over a period of three months can be detrimental to the size of the crop. A young tree can start producing three to five years after planting and will continue to produce for 25 years. In 1978 the price of cocoa was unusually high, priced above $5000 per metric ton, due to drought which killed many trees. However, within four years the price dropped down below $1500 per metric ton. The high price in 1978 most likely spurred new planting leading to overproduction.

Cocoa futures contracts – Cocoa Fundamentals

A cocoa futures contract consists of the dried beans that are sold to processors who roast and grind the beans to produce a variety of products. The cocoa tree produces large seedpods that are split open to yield the beans in a mass of pulp. This mess is allowed to ferment for 1-7 days, depending on the grade of the beans. The juicy pulp is drained away leaving plump beans that have developed a rich fragrance and appear reddish-brown in color. These beans are then dried in the sun or baked in kilns to reduce the moisture content to 7%, thus making them ready for shipping. The harvest of the beans is generally done by manual labor.

Main Cocoa Producers

Main users or cocoa – Cocoa Fundamentals

The main users or cocoa grinding countries are the United States, the Netherlands, Ivory Coast, and Germany. This information may be irrelevant to trading but is interesting to chocolate aficionados like me. Cocoa beans are first cleaned and roasted. A winnowing machine removes the shell leaving the cocoa “nibs.” A processor may use a variety of beans to get the result they want. These nibs go through an alkalization process to develop flavor.

users or cocoa

They are then milled (ground) resulting in “cocoa liquor”. The liquor can be pressed to yield cocoa butter and the resulting leftover mass referred to as “press cake” A processor can control the amount of cocoa butter extracted, to produce presscake with different levels of fat. The press cake is pulverized to give us cocoa powder. Chocolate as we know it is made by the cocoa liquor, additional cocoa butter, sugar, emulsifiers, milk (optional) and vanilla.

consumption of cocoa

International Cocoa Organization

The International Cocoa Organization (ICCO) boasts a membership of 42 countries, which represent 80% of world cocoa production and 70% of consumption. The ICCO issues quarterly reports on estimates of world production and usage. They also forecast production and consumption for the following year. For example in the 2000-01 forecast, production is expected to drop 7.6% to 2830 thousand tons, while grindings will increase by 2.2% to 3007 thousand tons. This drop-in production is probably in response to the very low cocoa prices that producers have had to deal with in 1999 and 2000. Cocoa prices hit an all-time low in late 2000. In the early part of 2001, cocoa rallied from $750 to over $1200, perhaps in response to the expected cutbacks in production and higher consumption.

In 1972 the ICCO attempted to stabilize cocoa prices by creating export quotas and a Buffer Stock program to absorb excess production. Prices were relatively high through the 1970’s so the Buffer Stock program was not implemented until 1982. By then, the quota system had been discontinued by a new agreement made in 1980. The Buffer Program ran out of money after purchasing 100 thousand tons in 1981. It was not until 1988 that another 150 thousand tons were purchased. Member countries funded this Buffer Stock program by paying levies on imports and exports. The program was suspended as member countries started to have problems paying these levies and experienced disagreements. The 1993 agreement called for the liquidation of the Buffer Stocks over the next five years. Notice how the price of Cocoa rallied during those years contrary to logic. As silly as it may sound, resumption of the Buffer Stock program has become an issue again since the price of cocoa dropped so low in the year 2000. It is interesting to note that the price of cocoa did rally significantly in early 1981, in response to the expectation of the purchases by the program. But once the program was implemented, the impact was minimal in helping prop prices up.

Supply/demand factors – Cocoa Fundamentals

In addition to supply/demand factors and weather concerns, other factors that can impact price are diseases, such as witches’ broom, or infestation such as the Indonesian cocoa pod borer. Political instability can also have a short-term impact on prices. Just recently, the market had short-term rallies amidst a downtrend in the year 2000 due to military uprisings in Indonesia. International trade of products can be interrupted during these periods. Also, rumors or incidents of crop destruction in Africa, to protest low prices, led to short term price fluctuations in the futures markets. The consumption of chocolate is considered to be a luxury item in many countries so a major downturn in the world economies can also dampen demand.

cocoa supply demand

This may be a critical factor in 2001-2002 as many economies are facing a major downturn. There are other organizations that can exert influence on the price by their policies. For example, the European Union issued a directive in 2000 (to be implemented by 2003) which allows the replacement of cocoa butter with cocoa butter substitutes up to 5% of the weight of the finished product. Many countries prohibit the use of substitutes in products sold as chocolate, including the United States.

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