Invisible Hand Is Confused

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.

Then, a day later, Business Week reported that cocoa prices increased because of concerns that “demand may exceed global production.” What a difference a day makes, twenty four little hours, to quote Stanley Adams.

Uncertainty obviously reigns in the world of cocoa futures. The dire predictions of production shortfalls have not come true. At the end of January, the Côte d’Ivoire had delivered 779,000 tons, 70,000 tons more than in the last year. Ghana’s production is similarly ahead of last year. And Indonesia‘s output is up 8 percent over last year. There’s little doubt that higher prices and good weather have encouraged more production around the world.

At the same time, consumption in Europe is down according to the first Business Week article. But a day later, Valentine’s day and Easter are supposed to pick up the slack and cause a deficit. Hmm. The invisible hand doesn’t know what’s going on. Makes you wonder where else it’s just throwing dice.

UPDATE: Just after posting this, Business Week found the real culprit: It’s the weakening Euro which makes the Dollar stronger which makes investors leave commodities. You go figure.

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