Futures markets are basically places where people sell things they don’t have to people who don’t want them. In plain English, this means, traders just shuffle papers in the hopes of either averting price risk or making a profit. Positions are squared with opposite positions before the due date and nobody ever has to deal with the messy reality of the actual commodity. Only two percent of futures contracts in cocoa ever result in actual delivery of cocoa.
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”
