When discussing cocoa trading, a clear distinction has to be made between the actual or physical markets and the futures or terminal markets. Nearly all cocoa coming from origin countries is sold through the physical market. The physical market involves the type of business that most people normally think of when talking about trading in commodities. The structure and length of the cocoa marketing channels differ from region to region within the same producing country as well as across producing countries. At one extreme of the spectrum, the marketing channel between cocoa farmers and exporters encompasses at least two middlemen: small traders and wholesalers. Small traders buy cocoa beans directly from farmers, visiting them one by one. In a second stage, small buyers sell the beans to wholesalers, who in turn will re-sell them to exporters. At the other extreme of the spectrum, cocoa beans are sold directly to exporters by farmers' cooperatives or even directly exported by the co-operative.
Once cocoa beans have been graded and loaded into cargo vessels, they are shipped either in new jute bags or in bulk. In recent years, shipment of cocoa beans in bulk has been growing in popularity because it can be up to one third cheaper than conventional shipment in jute bags. Loose cocoa beans are loaded either in shipping containers or directly into the hold of the ship, the so-called "mega-bulk" method. The latter mode is often adopted by larger cocoa processors.
There are only two places where cocoa futures contracts can be exchanged: NYSE/LIFFE Futures and Options (London) and ICE Futures US (New York). These organized exchanges provide the facility and trading platform that bring buyers and sellers together. Moreover, they set and enforce rules to ensure that trading takes place in an open and competitive environment. For this reason, all bids and offers must be made through the Exchange's "Clearing House", either through the exchange's electronic order-entry trading system, as in LIFFE, or in a designated trading pit by open outcry, as in ICE. As a result, the Exchange's Clearing House is acting as the buyer to all sellers and the seller to all buyers.
Futures market participants fall into two general categories: commercial (i.e. hedgers) and non-commercial traders (i.e. speculators). Commercial traders are market participants who try to avoid or reduce a possible loss in the cash market by making counterbalancing transactions in the futures market. On the other hand, non-commercial traders do not produce or use a commodity, but risk their own capital by trading futures in that commodity in the hope of making a profit on price changes.