Speculation and Cocoa Prices – again

Almost six months ago, I wrote about the potential impact of investment funds flowing into the commodity markets. Commodity markets used to be the realm of those who knew what they were doing. Traders became experts in one particular commodity and used that expertise to make a profit. But then the mortgage crisis happened and a lot of money is desperate for profit. Like a junkie searching the streets for another hit, hedge funds and all the other players who brought us the “subprime” mortgage meltdown are flocking to the futures markets. And cocoa is one of the next targets.

My suspicions in January are now being confirmed by executives of chocolate makers. A report in the Wall Street Journal cites several sources who blame the high cocoa prices on speculators who have driven up the market. Stephanie Garner, a trader in London explains: “In my lifetime, it’s an entirely new phenomenon. It’s to a large extent a fallout of the credit crunch.” And the International Cocoa Organization (ICCO) has reported that the gap between this season’s harvest and cocoa demand is a mere 50,000 tons, an amount that is easily covered by existing stocks. In other words, there’s no reason for the high prices.

Yesterday’s spot market price for Ghanian cocoa was $3272 per ton compared to $2150 in January. But very little cocoa is bought on the spot market. Most cocoa is sold in forward contracts and those prices are often determined a year ahead of time. So the current prices won’t show up in the producer countries until the next growing season, if at all. And New York futures for June delivery closed at $2785 yesterday, quite a bit less than the spot market price. And only 2% of cocoa contracts traded will actually result in delivery of cocoa, the rest are squared before the due date. That’s how the chocolate industry protects itself against price fluctuation. The speculators may or may not make money on it, but the big winner is the industry. 

In the meantime, the industry pushes for increased output in new growing areas. So the high prices are likely a momentary blip on the screen. In short, none of this means much to cocoa farmers. Once the big money players find another promising investment, cocoa prices will go back to where they were. And the farmer will still be growing cocoa, hoping to make a decent living.

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