How spread betters can profit from chocolate

Chocolate's main ingredient, cocoa is getting rapidly more expensive. It's up 12% so far this year. Tim Bennett explains how to play the price rises with a spread bet.

Chocoholics watch out! Your favourite vice is getting rapidly more expensive. However, you can offset the rising price of chocolate with a spread bet. Here's how.

First off what's caused recent sharp rises in the chocolate price? The answer lies in a part of the world that sits off the radar for many investors the Ivory Coast. Political stalemate has sparked a ban on cocoa exports initiated by presidential claimant Alassane Ouattara, furious that his rival refuses to step down. And that matters, because 40% of global supplies originate there.

Markets hate uncertainty about such an important source of supply, so it's little wonder the cocoa price has shot up. As James Moore reported in the Independent, prices are up 12% this year so far with cocoa futures traded in London jumping yesterday to a six-month peak of £2,269 per tonne before easing back.

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And although chocolate manufacturers, anxious about the impact of price rises on Easter sales, are dismissing recent rises as "temporary", as Moore notes "the price of sugar and other commodities that go to make chocolate is rising relentlessly".

For spread betters, there's an opportunity here. Cocoa is a commodity that you can play long or short via a broker. For example, as Max Julius reported on Citywire, last week CMC markets was offering a spread of 2,221-2,225.

You could place an upbet at, say, £10 per point (although a smaller bet of say £1 per point would be a lot safer). If the spread then moves to say 2,230-2,234, you close out and make a profit of five points (your selling price of 2,230 less your buying price of 2,225). At £10 per point, that's £50.

However, anyone fancying this type of bet should watch out. Commodities such as cocoa can spike and dip sharply in price. So keep bet sizes low and ask your broker about stop losses to limit the damage if things go wrong.

Also, make sure you've done your homework if you'd never noticed the importance of the Ivory Coast before now, big cocoa spread bets are not a good idea until you've done a lot more research!

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.