Author: Michael

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More Speculation in Cocoa

In my post six days ago, I mentioned the fact that investment funds may be one of the reasons why cocoa prices have been higher over the past year. Just two days ago, the Guardian reported the same development. An unnamed U.S. trader is quoted as saying: “The weight of money from investment funds will dictate prices rather than fundamentals (supply/demand).”

So let me get this straight, investment funds, desperatly seeking profitably investments in the wake of the subprime loan debacle, are sinking money into cocoa futures and options. At the same time, people who pay attention to the cocoa market are predicting that the gap between supply and demand will be much narrower for the current season than it was for the last season. Yes, demand is strong, but supply has not fallen behind. New producers are coming online and existing ones are expanding production.

It seems to me that the speculations of investment funds will only exacerbate the fluctuations of cocoa prices and farmers may well again be left holding the bag.

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Will cocoa prices keep going up?

One of the points often ignored in the whole debate about child labor in West Africa is the fact that cocoa prices were at an all time low just when the first reports of child slavery emerged in the Western press. According to IMF price data, the average price in 2000 was $903/metric ton, a bare shadow of the $3,791 cocoa commanded in 1977. And these aren’t just a few market swings. There’s been a long term decline in cocoa prices.

Over the past months and years, however, the prices have increased somewhat. There’re still nowhere near the high points of the late 1970s, but they have been consistently above  $2,000/metric ton for December 2007, reaching as high as $2,210 before falling off again. In a report, the ICCO indicated that for 2007, cocoa prices increased by 23% in New York. While there are some indications that investment funds, reeling from the subprime mortgage crisis, are looking for another speculative vehicle, there are also indications that the world supply of cocoa is not keeping up with demand. For the cocoa year 2006/07, the ICCO’s revised estimate shows a growing gap between total production and total cocoa grindings. If this represents a new trend then there may be some hope that the increase in prices will allow farmers to higher adults rather than children on their farms.

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Côte d’Ivoire on track to meet July 1 deadline?

Today, Reuters South Africa reports that the Côte d’Ivoire is set to meet the July 1 deadline to certify that its cocoa beans are produced without the worst forms of child labor. Behind the headlines, though, things look a little bleaker. Congressman Engel is quoted in an AFP article that only 50% of the cocoa producing regions will eliminate the worst forms of child labor in their production of cocoa. I doubt even that will be achieved. The Payson Institute report I mentioned earlier shows that the chocolate industry does not have in place anything that looks like certification scheme. It looks like all the players will simply declare compliance on July 1. There will be some remarks about the difficulty of assessing the magnitude of the problem. And after that, everybody will go back to business as usual. The farmers, of course, will be no better off.
March cocoa futures NY: $2151
Côte d’Ivoire Cocoa Spot Price: $2463

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U.S. Lawmakers visit Côte d’Ivoire to check progress on child labor

Tom Harkin and Elliot Engel who crafted the voluntary child labor protocol in 2001 are visiting the Côte d’Ivoire to get a first hand look at progress made to eliminate the worst forms of child labor there. They are unlikely to find much. The 2005 deadline in the original protocol passed without any measurable progress. The chocolate industry promised a system by 2008 but last October the Payson Institute at Tulane University indicated that there was no indication that such a system as emerging. It is therefore doubtful that the 2008 deadline will be kept and that there will be a system in place that can assure consumers that the cocoa in their chocolate bars was not produced by children who worked either in dangerous circumstances or who were forced to work without pay.

NY cocoa futures March delivery: $2131

Côte d’Ivoire cocoa spot price: $2468