Bitter Chocolate

The rational way to determine prices

For anyone believing in the power of markets to accurately predict the future, this week was a challenge. On Wednesday, Business Week reported that cocoa prices were dropping on “concerns supply will outpace demand.” Cocoa butter has been piling up in Europe with stocks reaching 50,000 tons. Inventories in NY are rising as well. Finally, a bank projection puts the production of the top three growers (Côte d’Ivoire, Ghana and Indonesia) at 2.59 million tons, about 160,000 tons more than last year. So the speculators got out of the game.

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Last night, CBS’s Sixty Minutes broadcast an investigation into the wild swings of the oil prices last year rising to $147/barrel and then falling to less than $40/barrel in a short period of time. The report offers some prime evidence that investment and hedge funds were the primary movers behind these price increases and that some investment banks may actually have profited from these movements as they invested in commodities while owning oil facilities.

Much of what happened in the oil sector can also be applied to the cocoa sector. Just substitute cocoa for oil and the same logic held true for cocoa: a sharp increase in price without evidence of a shortage of beans and a subsequent decrease without any news of a large oversupply.

The report concluded with a call for more oversight and regulation, call I can only second for the cocoa markets.