Cocoa – the principle ingredient in chocolate – comes from the cacao tree, which is grown on millions of small, family- run farms worldwide. Cocoa beans are used to make chocolate, candy bars, and hot chocolate drink. By the 18th century, every country, from England to Austria, was producing confections from the fruit of the cocoa tree.
During this period, the introduction of the steam engine mechanized cocoa bean grinding, reducing production costs and making chocolate affordable to all. Cacao (cocoa) is produced in countries within 10° south and 10° north of the equator. The largest cacao producing countries are Ivory Coast, Indonesia, Ghana, Nigeria, Brazil etc.
Cocoa trades on two world exchanges: London (LIFFE - Pound) and New York (ICE - USD). In 2011, trading volume of cocoa futures on the Intercontinental Exchange (ICE) was 4.95 million metric tonnes, outpacing production by 750,000 tonnes.
Conversely, ICE traded 3.8 million tonnes in 2010, 390,000 tonnes less than total production. Comparatively, ICE traded 5.2 million metric tonnes of coffee futures in 2011 and 5.5 million metric tonnes in 2010.1.
In November 2011, global sales of chocolate confectionery crossed $100 billion for the first time, with consumer demand for chocolate anticipated to continue increasing and likely outpacing supply (Bloomberg).
Numerous cocoa market experts and analysts provide reports based on historical, current, and projected levels. Cocoa bean production is closely monitored as trade balances, pricing, and futures contracts depend largely on supply side factors.
Total production has increased in absolute terms from 3.66 million metric tonnes in 2007-2008 to 3.98 million metric tonnes in 2011-2012. Change in production has not been linear, however, and has fluctuated in various patterns among the different regions. Africa has been and is projected to remain the principal cocoa producer with 73% market share last year.
Cocoa prices are affected by various factors including stock/grind ratios, expectations for future production/demand, global food prices, and consolidation/fragmentation in cocoa trade and processing industries.
These components generally set the tone for long-term trends in cocoa prices while trading by investment funds tend to drive movement in the short-term. Over the past five years, the price of cocoa overall has increased, but it has been prone to volatility from 2008 through 2011, spiking to a 30-year high of $3,625/tonne in January 2010 and dropping back to $2,200/tonne in December 2011.