A Funny Thing Happened on Thursday

Futures markets are basically places where people sell things they don’t have to people who don’t want them. In plain English, this means, traders just shuffle papers in the hopes of either averting price risk or making a profit. Positions are squared with opposite positions before the due date and nobody ever has to deal with the messy reality of the actual commodity. Only two percent of futures contracts in cocoa ever result in actual delivery of cocoa.

Well, on Thursday, July 15, something funny happened. All through the week, news sources pointed to the large number of open positions. Some European cocoa processors, as I mentioned in the last post, were the first to point out this phenomenon and considered it a sign that too many speculators were in the market.

On Wednesday, Reuters reported that 26,821 lots, equal to 268,210 tonnes of cocoa, remained open at the beginning of the last trading day. That meant that unless  the party in questions entered opposing positions on that last day, someone was going get a whole lot of cocoa delivered. Given the premium of £260/ton that July contracts already commanded over September contracts, it was unlikely that the open positions would be squared.

And so, after trading ended in London on Thursday, the rare event happened. Someone took delivery of 240,100 tons of cocoa. The delivery amounted to basically the entire supply of cocoa stocks registered with the London exchange.

The implications for September are a bit scary. There are few stocks left in London. So when September contracts come due, there may not be enough actual cocoa to tender against contracts. So prices may rise even more.

Makes me wonder who needed so much cocoa. It’s a little reminiscent of the attempts to corner markets in the late 1800s. Since LIFFE is not as well regulated as ICE, who knows?

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