Ivory Coast Cocoa Market Update
Ivory Coast Cocoa Market Update
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Battle Pits Cocoa Speculators against Chocolate Makers
On the morning of July 15, 2010, Nauck realized he was being attacked.
It was 8:30 a.m. on a cloudless, beautiful day. Nauck was sitting at his desk made of polished Oregon pine on the fifth floor of an old factory building with a view of the church spires in Bremen’s market square. Nauck was going through his mail. The quarterly figures were looking good, the company had just hired 62 temporary employees and the economy was picking up steam. As he was going through his morning routine of checking prices and stocks online and glancing at a few websites, Nauck saw something that startled him.
The price of cocoa was dramatically high. In just two days, it had risen by 132 British pounds (€148, or $220), and it was still rising. During the course of that trading day, the cocoa price in London would climb to £2,732 per metric ton, a 33-year high. It made Nauck fear for his livelihood, his workers and his factory — in short, for everything he was about.
Nauck is the majority shareholder and managing director of Hachez, one of Germany’s 90 chocolate makers. The company was founded in Bremen in 1890 by Joseph Emile Hachez, and Nauck’s grandfather was already a co-owner in the 1920s. In 1990, when the company was in trouble, Nauck took out millions in loans and bought shares in Hachez. As the company’s new managing director, he updated its product line to suit modern tastes.
Anthony Ward, the man behind the attack on Nauck, is sitting in an office in London. The fund manager and trader has been given the nickname “Choc Finger,” a play on the James Bond villain Goldfinger. In the industry, though, it is meant as a term of admiration.
Anyone who understands the basic rules of Ward’s game, commodity speculation, can also understand why the global economy is plunging from one crisis to the next.
Ward doesn’t like journalists, and he hardly ever grants interviews. Instead, he employs two public relations agencies, whose publicists can say a lot without saying anything.
A broad-shouldered man in his early 50s, Ward grew up in an upper-class family with a long line of merchants. His grandfather reportedly supplied the British Navy with rum. His office is in a black-painted townhouse in Mayfair, London’s most exclusive neighborhood.
“When it comes to money,” says a man who worked with Ward for years, “he focuses on this goal alone.”
Cornering the Cocoa Market
Ward had long spoken of his ambition to corner the world cocoa market, and he had already attempted to do it twice before, in 1996 and 2002. He embarked on his third attempt on July 15, 2010.
Ward’s plan could work because the global economy has become more and more complex. The price of cocoa has been rising — seemingly unstoppably — for the last five years. But this is only part of the global boom in commodities. Over the last year, the price of wheat has risen by $4.83 per bushel, to $9.03. In the same period, the price of a metric ton of corn has gone up from $3.46 to more than $7.00.
Commodities speculation fuels inflation in India, drives up the price of tortillas in Mexico, causes famines and fuels political unrest. Speculators act as accelerants — and the smaller the market, the easier their game.
Cocoa makes up one of the world’s smallest commodities markets. Indeed, the annual harvest amounts to only 3.5 million tons, with more than half coming from Ivory Coast and its eastern neighbor, Ghana. The average price per metric ton is £2,000, meaning that it takes only £7 billion to buy a year’s harvest.
The cocoa market’s simplicity makes it particularly vulnerable to speculative attacks and attractive for the billions of roving dollars and euros. Depending on the estimate, speculation in the commodities markets alone entails somewhere between $400 billion and $800 billion. Ten years ago, it was only about $5 billion.
Experts say the money comes from three sources: from private wealth investors or, in other words, the world’s super-rich; from banks trading for their own accounts and at their own risk; and, finally, from pension funds in the West investing the retirement savings of millions.
The cocoa business is actually very straightforward. During the harvest, traders buy cocoa beans directly from farmers in places like Ghana and Ivory Coast and, later, they resell them to chocolate makers in Europe. Since traders can’t know when manufacturers will buy their cocoa, there is an exchange, where traders and others can buy and sell goods at any time. Still, the downside for traders is that the price that the exchange offers is generally lower than the price that chocolate companies pay.
To make cocoa scarce, Ward had to manipulate how the cocoa business works. He had to lure traders away from the chocolate factories and convince them to sell their cocoa on the exchange, instead, because it was only there that he could buy large quantities of cocoa in an ambush-like maneuver.
Chocolates may not come easy on the pocket as cocoa prices surge ahead in the domestic market due to global supply constraints.
India imports more than half of its requirement of cocoa every year with demand increasing at a rate of 8% per annum. “With supply from Ivory Coast disrupted due to political problems, availability is low in most of the markets,” traders said.
Indian cocoa prices are now at a premium of more than 12-15% compared to the global markets. Dry beans at the farm gate are above R175 per kg while wet beans are selling at around R55 per kg in Kerala. “There is a scramble for cocoa and the supply is tight. Farmers are getting good returns for their crop,” Shiny George of Indian Organic Farmers Company.
Ivory Coast produces nearly 40% of the world’s raw cocoa, valued at about $3.8 billion. Interestingly, the wholesale price of cocoa has been surging ahead and doubled in the previous four years as global demand increased, particularly in India and China.
No one is taking the cacao or cocoa plant for granted these days. Chocoholics and chocolate manufacturers everywhere are anxious about the political turmoil in the Ivory Coast, the West African nation that produces nearly 40 percent of the world’s raw cocoa, valued at about $3.8 billion.
“Cocoa prices should come down by another $100, but not more, as there is a logistics nightmare waiting for the supply chain on the ground — banking, storage, trucking, workers, cash. No one will return until the guns are silenced.” – Luis Rangel, ICAP Futures
Alassane Quattara, the winner of the Ivory Coast’s November presidential election, suspended all cocoa and coffee exports for 30 days to cut off funds to incumbent President Laurent Gbago, who refused to leave office after a run-off election and who threatened to take over the purchase and export of cocoa.
While 68 companies are licensed to export cocoa from the Ivory Coast this season, the market is dominated by major international firms, such as Cargill, Archer Daniels Midland and Barry Callebaut AG. Among them, they bought 630,371 tons of cocoa during the 2009-10 season, more than half of the tonnage registered.
Cargill Inc.’s Ivory Coast unit honored the ban and suspended purchases. ADM told Dow Jones it was evaluating the situation, as did Barry Callebaut, adding it had sufficient cocoa stocks to cover its processing needs.
Even before the ban, the wholesale price of cocoa doubled in the previous four years as global demand increased, particularly in Asia. Uncertainty of supplies — and British commodity trader Anthony Ward’s attempt at cornering the cocoa market last year — led to cocoa powder prices holding at historical highs in 2010, and it appears volatility will continue to put pressure on prices.
The Rest is Up to You…
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