One of the simple pleasures of life is on a cold winter's day to snuggle up in your favorite chair with a nice warm blanket and drink a cup of hot, rich cocoa. Or just ask a chocoholic about the pleasures of eating luxuriant chocolates - true comfort food.

But cocoa can be more than something that makes you feel good by eating or drinking it; it can also be a good investment and make you money. Cocoa is considered to be a so-called soft commodity. Other commodities in that grouping include: coffee, sugar, orange juice and tea. (Learn more about these commodities in The Sweet Life Of Soft Commodities.)

Most soft commodities are united by two facts: production is concentrated in a small group of developing countries and mostly in tropical areas of the world. This makes these commodities more prone to output troubles due to weather, conflicts, credit shortages or the inability to respond to rising prices. For example, with cocoa the Western African nations of the Ivory Coast and Ghana account for 60% of the world's output, with the Ivory Coast accounting for 40% of production.

The Cocoa Market
Right now, things are not so sweet in the cocoa market for consumers, as prices are climbing. Cocoa demand is set to quickly recover from the global economic downturn, and is expected to grow between 1.5% and 3% in 2009-10. The pick-up in demand will create a market deficit for the fourth year in a row. According to the International Cocoa Organization, the worldwide cocoa deficit this year will widen to 73,000 metric tons as compared to 62,000 metric tons last year.

This will be the fourth consecutive year that cocoa production has lagged consumption. Forecasts that consumption will again outpace supply next year has raised fears that the cocoa market is entering its worst period of shortages in 40 years, since 1965-1969.

There are fears that the harmattan – the dry,dusty wind that blows in from the Sahara – may be too strong in the early part of the year. If so, flowering could be jeopardized and production would be seriously damaged in the Ivory Coast, Ghana, Nigeria and Cameroon. There are also worries that El Nino weather patterns will bring drought to south-east Asia and torrential rains to some areas in Latin America. This could affect production in Indonesia, the world's third-largest producer, and Ecuador, the seventh-largest producer. But the bull market in cocoa has its true roots in the world's biggest producer: the Ivory Coast.

The Ivory Coast
There was a poor harvest this season as Ivory Coast's cocoa crop was riddled with black pod, vascular streak and swollen shoot diseases, and drenched with too much rain. After a poor harvest this season, there are growing fears that the country's aging trees will deliver an even smaller crop in 2009-10, even if they get favorable weather. There are worries that falling output in the Ivory Coast will leave a lasting market deficit. (Learn more about how nature impacts the market in Preparing For Nature's Worst.)

Small farmers in the Ivory Coast – among the world's most heavily taxed growers – have neither the money nor the incentive to buy fertilizer or replant trees to increase output. In fact, many farmers have abandoned cocoa and switched to rubber as they seek higher returns. This may lead to Ivory Coast output to decline by as much 15% next year. Some are warning that production could fall by more than 100,000 metric tons in 2010, after a fall of about 200,000 metric tons in the 2008-09 season.

In fact, cocoa buyers such as Cadbury (NYSE:CBY) and Nestle (OTC:NSRGY) are so worried that they have launched programs to replant trees in a desperate effort to avoid a long-term decline in output. No one is certain whether these efforts will succeed. But lead times in new cocoa plants are long. From planting it takes three to four years before the plants yield anything at all. And even then they are probably several years away from being cash-flow positive. And finally, we have the fact that many chocolate manufacturers have yet to cover their needs for next year.

How to Enrich Your Portfolio
It all adds up to sweet times for investors in cocoa. Investors could play the cocoa market by purchasing cocoa futures or options on cocoa futures directly. But there is an easier way for American investors to gain exposure to cocoa.

There is an exchange-traded note (ETN) which trades on the New York Stock Exchange just like a stock - the Dow Jones-UBS Cocoa Subindex Total Return ETN (NYSE:NIB). This unleveraged ETN is based on cocoa futures and will mirror the performance of cocoa, minus the fees of course. The price of cocoa is down about 10% after recently hitting a 32-year high at over $3,400 a ton, so now may be a time to look at cocoa after its correction. The problems in the Ivory Coast look to be long-term problems, so investors still have plenty of time to get on board this upward trend in cocoa prices.

Investors may just want to sit down, relax and enjoy some hot cocoa. (Learn more about commodities investing in An Overview Of Commodities Trading.)

Related Articles
  1. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  2. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  3. Economics

    The History of Stock Exchanges

    Stock exchanges began with countries who sailed east in the 1600s, braving pirates and bad weather to find goods they could trade back home.
  4. Investing Basics

    The Importance of Commodity Pricing in Understanding Inflation

    Commodity prices are believed to be a leading indicator of inflation, but does it always hold?
  5. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  6. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  7. Fundamental Analysis

    Performance Review: Commodities in 2015

    Learn how commodities took a big hit in 2015 with a huge variance in performances. Discover how the major commodities performed over the year.
  8. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  9. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  10. Stock Analysis

    The Biggest Risks of Investing in SandRidge Stock

    Learn about the significant risks of investing in SandRidge. Read how the company may not be able to service its substantial debt load.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  5. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  6. Do penny stocks trade after hours?

    Penny stocks are common shares of public companies that trade at a low price per share. These companies are normally small, ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center