Tag: futures markets

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Speculation and Commodity Prices

Last night, CBS’s Sixty Minutes broadcast an investigation into the wild swings of the oil prices last year rising to $147/barrel and then falling to less than $40/barrel in a short period of time. The report offers some prime evidence that investment and hedge funds were the primary movers behind these price increases and that some investment banks may actually have profited from these movements as they invested in commodities while owning oil facilities.

Much of what happened in the oil sector can also be applied to the cocoa sector. Just substitute cocoa for oil and the same logic held true for cocoa: a sharp increase in price without evidence of a shortage of beans and a subsequent decrease without any news of a large oversupply.

The report concluded with a call for more oversight and regulation, call I can only second for the cocoa markets.

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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. Continue reading “Speculation and Cocoa Prices – again”

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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.