What goes up must come down. The old trading adage certainly applied to cocoa this summer. After reaching $3,290/ton on July 1, the futures price dropped to $2,801/ton by July 28. That’s a drop of almost $500 in a month. Nobody can explain such a decline with changes in supply and demand of cocoa. There was no news of larger than expected increases in cocoa supplies. If anything, there were indications that the light harvest in both Ghana and the CÃ´te d’Ivoire would be less than last year. So it’s back to the speculators.
I have argued before that speculators have more impact on cocoa prices than they should. And an article in the Wall Street Journal (not you bastion of anti-capitalist rants) seems to support that notion. On May 28, Aaron Patrick reported that only three years ago, speculators held 260,970 tons worth of cocoa contracts while the chocolate industry held 924,700 tons. By mid-May 2008, those positions had changed quite a bit with speculators holding 654,760 tons compared to 706,430 tons held by the chocolate industry.
I think it is clear that such a large percentage of cocoa held by speculators cannot but influence prices one way or the other. In this case, they forced prices up. Some of the chocolate makers have come out to share this position. The article quotes spokespersons for Storck AG, Cadbury and Lind & SpÃ¼ngli and they all see speculators as responsible for the increases in cocoa prices.
Once they leave cocoa for other speculative ventures, the price will come down again creating exactly the kinds of fluctuations both cocoa producers and manufacturers like to avoid. Sure, the chocolate industry wants cheap cocoa, but more than that, they prefer stable prices over wild gyrations. That they have in common with cocoa producers.
It is time to negotiate a new cocoa agreement. The first three agreements (1972,1975 and 1980) contained provisions for buffer stocks to insure price stability and predictability. By 1986, with Reagan and Thatcher preaching neoliberalism everywhere and Third World power rapidly evaporating under the onslaught of IMF structural adjustment, these buffer stocks were eliminated from the treaty. The next three agreements, including the current agreement (2001), do nothing for price stability. That worked well for the industry as long as prices kept going down as they did from 1980 onward. But we may have reached a new point in history where consideration of non-market based methods of supply management hold promise for the industry as well.