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Cocoa bean speculation is causing price volatility, analyst

By Ben Bouckley , 16-Aug-2010

Recent cocoa bean price volatility is due in large part to hedge funds attracted by quick returns taking short-term positions on the commodity, according to a leading analyst.

Francisco Redruello, senior food analyst at Euromonitor International said that recent price fluctuations partly triggered by a £650m purchase of 250,000 tonnes of cocoa by hedge fund Armajaro in late July – around 25 per cent of total stocks in Western Europe – were symptomatic of wider interest amongst hedge funds.

Redruello said: “Research suggests that, after the tightening of fiscal and financial rules, hedge funds are turning to food commodities to make a quick profit. Speculative movements have been linked to traders taking advantage of historically low interest rates and weak US dollar exchange rates, which has allowed them to borrow ‘cheap dollars’ to fund short-term positions on cocoa beans.”

Prices for cocoa beans fell to a three-month low in London early last week, with a pending improved September harvest from the Ivory Coast (which supplies 40 per cent of the world’s cocoa) of 1.3m tonnes a major contributing factor. Nonetheless, on July 19 prices hit £2,465, the highest in 32 years, and Redruello believes that general cocoa market conditions make the commodity a viable target for investors.

“The fact that most cocoa production is concentrated in developing countries, which are prone to political turmoil and suffer from poor central planning, makes the upgrading of plantations quite unlikely in the medium term.

“As a result, rumours about poor harvests or the effects of natural catastrophes on crops unnerve chocolate manufacturers almost instantly…it is this business environment that hedge funds have quickly spotted a weakness upon which they can quickly cash-in.

Traders demand regulation

Following the Armajaro transaction, traders concerned about market uncertainty demanded a review of rules governing speculative positions in cocoa, due to fears of damage to producers and consumers.

Members of the New York Stock Exchange (NYSE) Liffe and the London International Financial Futures Exchange recently wrote to the exchanges complaining that price manipulation was bringing the London market into “disrepute”, while 16 European trading organisations wrote to NYSE Liffe protesting at lack of transparency and controls.

But Redruello told ConfectioneryNews.com that trading rules were unlikely to change: "It's unlikely in the short-term, because it's a commodity like any other, and if you apply rules to cocoa, then why not wheat, corn, milk?"

Moreover, in late July the ICCO said that the Armajaro purchase would not impact hugely upon prices, given promising signs regarding crop output from the Ivory Coast, where recent high prices have allowed growers to invest in their farms. To an extent this analysis was borne out by last week’s price falls, but Redruello highlighted several other factors that, subject to uncertainty about harvests, could drive up prices in the medium to long term.

Structural weaknesses

He cited political turmoil in major producing countries and an unduly heavy dependency on Ivory Coast cocoa, which suffers from “chronic under-investment and high taxes” that leads many farmers to favour rubber as a more lucrative commodity.

Redreullo said that Ivory Coast production was on a downward curve, with under-investment meaning that many cocoa trees are now over 25 years old and past peak productivity.

Although the ICCO anticipates that world cocoa production will increase by three percent during 2009/10 – with Euromonitor predicting stagnant chocolate confectionery demand – it predicts that end-of-season cocoa stocks will still fall this year, with further strain on supplies imminent due to an anticipated two per cent rise in confectionery retail sales volume in 2011.

“Stronger performance of cocoa-intensive dark chocolate formats in categories such as boxed assortments and tablets is predicted to put further strain on global demand for cocoa beans,” Redreullo added.

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