Several news sources reported that cocoa futures hit a 23-year high in London yesterday with a price of £1,824.33/ton. However, the U.S. price stayed more moderate with a price of $2,666/ton, quite a bit below the July high above $3,000/ton. The reason for this discrepancy lies in the appreciation of the dollar since July.
One of the strange developments since the current financial crisis really hit has been the recovery of the dollar. A year ago, a British pound cost almost two dollars. Today, that same pound can be had for $1.48.
Now you may wonder why it is that the value of the dollar appreciates when the entire crisis has been precipitated by U.S. over-consumption financed by debt in the form of capital inflows from abroad. The fact that the entire debt-financed consumption bubble collapsed should give investors doubt about the solidity of the dollar. This could have been the moment for investors to look for more sustainable long-term investments elsewhere in the world. Mind you, that is sorely needed. There are billions of people who could benefit from such investments.
But no. In a sign that markets are not at all rational but driven by fear, money flowed into the U.S. increased as the crisis unfolded, leading to an appreciation of the dollar against other currencies. This despite the fact that foreign investors are lending the U.S. government money essentially for free. Now there’s a great investment: lend free money to the very government that has fostered the culture of debt-financed consumption which has just destroyed trillions of dollars in investment values.
So London cocoa is riding high, but I wonder how long that can last.
In the meantime, happy holidays to everyone and enjoy your favorite treat with fair trade chocolate!
