Can You Bet on Soaring Cocoa Prices with ETFs? Kind Of – Here's How

Why are cocoa prices moving?

Cocoa is more than just the primary ingredient in chocolate; it's a significant agricultural commodity influenced heavily by climate conditions.

One of the primary reasons commodity prices, especially those of agricultural products, fluctuate is due to the impact of climate disruptions on harvests. This context is crucial to understanding the recent surge in cocoa prices.

The significant uptick in cocoa prices can be attributed mainly to suboptimal harvests in the Ivory Coast and Ghana, the world's leading cocoa producers. These nations have encountered a slew of adversities, chiefly brought on by El Niño.

This weather phenomenon has induced heavy rains, leading to crop damage and the proliferation of black pod disease, a fungal infection detrimental to cocoa plants. Additionally, factors like extreme heat, the ageing of cocoa trees, and illegal mining activities have compounded, significantly diminishing the cocoa supply.

Reflecting the impact of these challenges, cocoa production forecasts have been revised downwards. Ghana has adjusted its production forecast for the current year to 650,000 tons, marking a decrease from an initial forecast of 850,000 tons.

Similarly, the Ivory Coast's mid-crop harvest, commencing in April, is anticipated to see a 33% decline to 400,000 metric tons (MT), from 600,000 MT in the previous year.

Moreover, the escalating costs of cocoa beans have led to disruptions in cocoa processing activities within the Ivory Coast and Ghana.

With cocoa bean prices climbing, some processing plants have been compelled to scale back or cease operations altogether, as sustaining production becomes increasingly unfeasible. This reduction in processing activity has further tightened global cocoa supplies, propelling the prices even higher.

Which ETFs have exposure to cocoa?

While the UCITS ETF market in Europe offers pure-play cocoa ETFs from WisdomTree, U.S. investors don't have direct equivalents. The most similar product previously available was the now-delisted iPath Bloomberg Cocoa Subindex Total Return ETN (NIB).

One such option is the Teucrium AiLA Long-Short Agriculture Strategy ETF (OAIA). This ETF operates similarly to a hedge fund, focusing on the agricultural futures market.

It employs a long and short strategy on various agricultural futures, aiming for positive absolute returns with low correlation to stock markets. This strategy is driven by quantitative analysis, following signals and trends.

As of March 27, OAIA includes some cocoa exposure, notably with a position in Cocoa Futures dated September 24, representing around 1.68% of the fund's portfolio.

Another route for indirect cocoa exposure is through shares of companies involved in the production and distribution of confectionery, either as their main business or as a part of their wider operations. Companies such as Hershey's, Mondelez, Kraft Heinz, and Sysco fall into this category.

However, investors should approach this method with caution. Rising cocoa prices can negatively impact these companies in the short term, as their costs increase. Furthermore, their performance may not closely correlate with cocoa prices due to their diversified operations.

For those interested in this approach, the Invesco Food & Beverage ETF (PBJ) provides exposure to all four aforementioned companies, along with 28 others, for a 0.57% expense ratio.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.