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Technical Analysis

Cocoa: An Eccentric Agricultural Commodity

by Patrick Oberhaensli, on Oct 12, 2020 4:15:00 PM

Cocoa, as a financial investment via futures (directly or indirectly), is not easy to handle. This is the case for many commodities. Investors cannot “simply expect” that a commodity’s price will go up with time and it is even less so the case in commodities with an agricultural nature. In the first part of our cocoa article series, we will discuss the price based risk and return elements of a long-only cocoa investment.

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Cocoa Long-only Passive Performance

We analyzed the performance of a long-term cocoa investment and made a number of significant observations. Investors should note, that the use of futures in order to implement exposure, will also come with rolling risk. The current backwardation term structure, where the futures further away are lower than the nearer ones, is (likely) an advantage for a long-only investment.

For the period starting in January 2009 up to the 3rd of August 2020, including specific costs, we have following results for a long-only passive Cocoa investment.

Long only passive cocoa investment

While the negative average annual performance on the long-term is at a glance problematic, it also comes with a maximum drawdown that is similar to US large cap equities. Where is differs, is that the volatility is almost twice that of US large caps! This is not surprising considering cocoa is an agricultural type of commodity. The high volatility level indicates to investors the potential to add value via an active strategy, something that the 55% of positive monthly performance certainly doesn’t suggest. And logically, the Sharpe Ratio is negative for the considered period.

Cocoa Price Behavior

Since 2009, cocoa has experienced a long-term down-trend. This can easily be shown graphically, although the 2011 high would need to be omitted. See the chart below. As of August 2020, the price has not emerged from its 2011 high (it would need a price jump of around 30% from the August 2020 observed levels).

Cocoa price analysis 2009-2020Courtesy of Trading Economics

How does this behavior compare with another volatile instrument such as US oil? US oil is characterized as having extreme moves that occur in both directions, they are both large and rapid. This is similar to the behavior of cocoa seen from September 2016 up to August 2017 where the price lost substantial value (even though May 2017 was among the best single months in terms of performance).

Investors can also see that the most positive year since 2012 is actually 2018 with a return rounded to 23%. This is particularly interesting considering that 2018 is also the year with the biggest yearly maximum drawdown: 35.44%.

In other words, the price behavior for cocoa futures can be summarized as a long-term trend following with shorter-term rapid moves. This type of price behavior requires investors to have the ability to be out of the market (or strongly underweight).

Considering a long term duration, there is very little correlation between cocoa and a multitude of markets such as: gold, US high yield bonds, US oil, US mid cap equities and US bonds. In fact, cocoa is below 0.20 in absolute for the period starting in January 2009 up to the 14th of August 2020. Actually, only gold exhibits a similar correlation characteristics within that set of markets. This lack of correlation is important for investors to consider in understanding the diversification potential of cocoa as an actively managed trading instrument.

Although traders might expect a cocoa price increase when considering the growing consumer demand caused by recent health trends associated with dark chocolate, there are a multitude of factors that influence prices other than consumer trends. These variables include weather, level of stocks, decisions about an increase of production (it takes several years for a cocoa tree to develop) and plant diseases, to name a few. This makes it very difficult for investors to model the price fundamentals properly.


If cocoa is in fact a very risky and poorly performing long-only investment, it doesn’t mean that there are not attractive years such as 2013 and 2018. Moreover, cocoa has the potential to become an interesting investment when managed in an unconstrained manner. That’s exactly what we will discuss in the second part of our cocoa article series.


  • This content is not intended to be a solicitation nor an offer
  • The preparation of the information provided herein is done with a high level of care. Nevertheless, errors are possible
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About this blog is a personal finance blog. The articles posted provide relevant trading information, aspects, and opinions from expert professional traders and data and analytics providers.

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