Choc Finger's Big Bet Speculators Rediscover Agricultural Commodities

With the financial crisis fading into the past, speculation on agricultural commodities markets has returned in force. Food prices are climbing once again as hedge funds rediscover the immense profits that can be made -- led by a British chocolate baron.

DPA

By and Alexander Jung


Even by the standards of London's exclusive Mayfair neighborhood, businessman Anthony Ward leads a luxurious lifestyle. He and his family live in a 500-square-meter (5,380-square-foot) townhouse with five bedrooms, each with its own bath. There are separate quarters for the staff. When Ward opens a bottle of wine on his veranda in the evening, it's likely that it comes from his own vineyard at the foot of Paardeberg Mountain near Cape Town.

Ward's fabulous wealth comes as a result of his involvement in the cocoa business. The 50-year-old Briton with the nickname "Choc Finger" heads Armajaro, a commodities business and hedge fund he co-founded in 1998. In recent weeks, the hedge fund has caused a furor in the commodities markets. Traders report that Ward has purchased a vast number of futures contracts for the delivery of 241,000 tons of cocoa worth $1 billion (€770 million).

The cocoa represents about 7 percent of annual world production, enough to supply Germany with chocolate for an entire year. It was also enough to substantially drive up prices on the cocoa market. Last week, the price of cocoa climbed to a 33-year high.

What is so unusual about the British investor's coup is that he did not resell the contracts on the London International Financial Futures and Options Exchange (LIFFE) before they expired, but instead took delivery of the beans. As a result, Armajaro now controls almost all the cocoa beans currently stored in registered warehouses in Europe, from Liverpool to Rotterdam to Hamburg.

Turbulence in the Cocoa Market

Processors and traders are now accusing Ward of trying to corner the cocoa bean market. "The market is increasingly being manipulated by a few people who control the market positions," says Hamburg cocoa dealer Andreas Christiansen, adding that speculators are taking advantage of the lack of transparency on the LIFFE. This, he says, harms smaller traders, whose hedge transactions are now no longer adding up. "A lot of people have been harmed here." Ward himself has declined to comment on these accusations.

The turbulence in the cocoa market is the most recent sign that speculation is back, and that the international financial markets have rediscovered agricultural commodities.

They are now betting big again on commodities like wheat, coffee, rice and soybeans. As a result, prices are no longer determined by supply and demand, but by investment banks and hedge funds.

Cocoa isn't the only commodity that has become significantly more expensive in recent months. The price of wheat has gone up by 17 percent since April, and soybeans by 12 percent. At the beginning of the year, sugar prices climbed to their highest level in three decades in the space of only a few months and then plunged by almost half. But now sugar prices are back up, climbing by almost 6 percent since April.

The food price index of the United Nations Food and Agriculture Organization (FAO), which aggregates price movements for key agriculture products, climbed to 163 points in June. This is only 15 percent lower than the all-time high of 191 points in 2008, the year of the financial crisis.

Price Explosion

At the time, rice prices rose by 277 percent within only six months, and corn became so unaffordable that millions of Mexicans could no longer afford tortillas, a staple in the country. Hunger riots erupted in Haiti, Egypt and more than 30 other countries.

Driving the price explosion was the growing use of agricultural commodities to produce biofuel. But 2008 was also the year in which, for the first time, the public realized that grain merchants were no longer the only ones trading on the exchanges (in their case, by buying grain futures to hedge against poor harvests), but that the major players in the financial markets had discovered the lucrative trade in agricultural commodities.

Last year, Goldman Sachs earned $5 billion in profits with commodities alone. Other major players include the Bank of America, Citigroup, Deutsche Bank, Morgan Stanley and J.P. Morgan.

They are no longer merely offering classic funds, but are now trading in financial instruments that function similarly to the subprime mortgage loans on the now-collapsed US real estate market. With these instruments, known as collateralized commodities obligations, or CCOs, profits are based on market prices. The higher the trading prices of wheat, rice and soybeans, the bigger the profits. The market's behavior reminds one of the Internet bubble at the beginning of last decade and the fluctuations just prior to the financial crisis, then-Merrill Lynch President Gregory Fleming said in May 2008.

Indeed, only about 2 percent of commodities futures now end with a real exchange of goods, the FAO concluded in a June study. "As a result, these deals attract investors who are not interested in the commodity itself, but merely in speculative profit," the FAO concludes morosely.

The finding is all the more remarkable given the widespread political and social outrage aimed at food speculators just two years ago. But little has changed since then. "Paradoxically, the financial crisis resulted in a brief pause for breath on the agricultural markets, but as the global economy picks up steam, the problems of scarcity are getting worse again," warns Joachim von Braun, an agricultural economist at the Bonn-based Center for Development Research and director of the renowned International Food Policy Research Institute in Washington.

Threatening Harvests

Even as trading in agricultural commodities is on the rise again, the underlying factors that have driven up food prices for years have not been eliminated. The production of ethanol and biodiesel still competes directly with food production. Energy is still so expensive that the costs of fertilizer and transportation make agricultural production unprofitable. And with 2010 shaping up to be possibly the hottest year on record, droughts in Eastern Europe and West Africa are threatening harvests.

Officials at the United Nations World Food Programme (WFP) already fear the worst. "The situation in many countries is already dramatic now," says Ralf Südhoff, director of the WFP office in Berlin. The sad record of more than a billion starving people worldwide could be surpassed this year.

The dire situation has prompted experts like Braun, as well as aid organizations and companies, to call for tighter regulation of financial markets. In March, Andreas Land, the managing partner of baked goods maker Griesson-De Beukelaer, complained that certificates were being traded for 60 million tons of cocoa, which he said was 20 times the annual volume of cocoa that was physically available. "This is neither good nor tolerable," said Land. "Speculating with food products shouldn't be allowed, unless you actually take delivery of the products."

Strictly speaking, it is re-regulation that many would like to see. In the United States, for example, the Commodity Exchange Act of 1936 limited speculation in agriculture commodities for decades. But thanks to the targeted lobbying activities of the financial industry, the law was watered down in the 1990s, leading to a sharp increase in the trading of food commodities. This shift has prompted agricultural economist Braun to call for more transparency, particularly when it comes to the question of who buys which contracts. "And second," says Braun, "we need to require higher capital investments on the part of traders, which would make speculating in basic food products less attractive."

Not Behaving as Planned

US President Barack Obama has already taken a step in this direction by making derivatives trading more transparent. The Europeans, on the other hand, are balking at taking even this first step to contain speculation.

EU Commissioner for Internal Market and Services Michel Barnier, who has described speculation with food products as "scandalous," plans to introduce legislation this year to impose stricter regulations. But the British have already announced their intention to create their own, less stringent rules for the London exchange. This comes as no surprise; London is the world's largest market for agricultural commodities outside the United States.

Cocoa king Ward, in other words, need not fear that his business will be restricted any time soon. Nevertheless, it is far from certain that his current massive bet will turn out in his favor. Worldwide demand for cocoa is growing, especially in Asia. But bad weather in the Ivory Coast, which produces 40 percent of the world's cocoa, does not bode well for a good harvest this fall. Ward is betting that chocolate makers like Lindt & Sprüngli or Kraft will soon have no choice but to order from him at higher prices, especially now that the Christmas business is around the corner.

The markets, for their part, have not behaved as planned. Immediately after Ward's coup, the price of cocoa beans dropped by more than 7 percent in three days.

But even should it turn out that Choc Finger made a bad bet, traders and processors are no longer willing to put up with such escapades. A group of 20 companies and associations has written a letter to the LIFFE demanding that it make trading more transparent, using the New York markets as a model. The New York exchanges regularly publish information on who is trading in the market, whether they are speculators or agricultural commodities traders, how many contracts they hold and what their positions are.

This week, critics of speculation were to hold talks with the managers of the LIFFE. "Everyone should be given the same opportunities," says cocoa dealer Christiansen. Still, it is hardly likely that new rules will be in place by the next maturity date for cocoa contracts in mid-September. In other words, cocoa speculator Ward still has some time left to win his bet.

Translated from the German by Christopher Sultan

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Norberto_Tyr 07/30/2010
1. If the XX was the oil century, the XXI will be the food century
If the XX was the oil century, the XXI will be the food century. Speculation with commodities has been known since long and it is highly profitable thanks to a dangerous zero sum game called futures. The XIX century revolved about full literacy (international 'news' agencies such as Reuter and Havas et al) tightly coupled with democracy, the XX century revolved around oil, the XXI will revolve around potable water, food’s footprint. Not for nothing the Hungarian-American currency speculator, stock investor, businessman, philanthropist, and political activist (as per Wikipedia 2010) entrepreneur Schwartz György alias George Soros “the man who broke the Bank of England” was caught buying large tracks of land in South America under anonymous Pty. Ltd. companies camouflage, specially within the River Plate basin, or around of what was called “La triple frontera” (“the triple border”), conveniently set by the British about post Napoleonic times (mid XIX century) in order to be able to trigger a conflict whenever was handy. As with Napoleonic wars, the entrepreneurial family of that times, the Rothschild’s, were involved in the financing of that holy ‘project’. In fact, the billiard flat and well-irrigated expanses of Argentina were designated by the fourth Zionist congress in 1904 as a place to set a home for the Jews, even though in the next congress, 1906, the Zionists switched the target to Palestine. Yes, in the XXI century the main commodity to be exported will be potable water, but not through pipes or tankers, it will be carried by food. Malthus was granted two centuries of rest due to the invention of the automobile by Daimler, the magnificent idea of autobahns and the concept of ‘a car for every person’, or at least a family. People forgot for a while about the Malthus effect (An Essay on the Principle of Population, 1798) stating that IF population growths exponentially while the production of food grows lineally the gap will increase to a point that will make feeding everyone impossible. That 'IF', the most important word (or concept I should say) plaguing ‘a priori’ with uncertainty our lives, climate change, gambling industry, pregnancies and so on vanishes ‘a posteriori’ demonstrating the fact that concepts are dead as fish floating on the surface of the water (as Schopenhauer would say), determines the future of the whole human race. The discovery by Justus von Liebig that adding nitrogen to soil can increase crops slackened the quest for potable water by both, the Rothschild’s’ family and US as well since oil offered a quickest chance to make easy profits. Now, 2010, the equation changed again, China and India have the challenge to feed thousand million people plus every single day regardless of climate conditions; this constraint places US in a similar situation as predicted by Malthus, even though the gap might not increase so sharply as originally predicted, there are enormous chances that things called by mathematicians as 'discontinuities’ might suddenly and unpredictably appear with catastrophic effects (natural and artificial, from the word 'art' or 'man-made'). Please forgive this digression and let me return to our topic, namely commodities speculation. In the famous 1996 movie “Mars Attacks!”, Jack Nicholson playing a Las Vegas gambling industrialist is inspired by the Martian slaughter of earth people recognizing that the Martians, acting like US, must have our same needs and desires as well (paraphrasing Professor Abraham Maslow et al), therefore they would surely be interested in both, pornography and gambling; thus, the Martian invasion was the millennium business opportunity (as was thought of Iraq and Afghanistan invasions). The commodities speculators surely did not missed that great movie, therefore they would not miss THIS business opportunity in order to make the most by means of gambling in the world's stock markets utilizing the most sophisticated mathematical models supporting the most extravagant financial 'products’, artifacts or concoctions, technically speaking. But, as we know, there is always a catch; this achievement might artificially make commodities far more expensive as they would be without vaporware tampering (buying and selling 'promises' between very unreliable people), thus triggering a snowball effect (feedback in the sense meant by Peter Senge), in turn presenting governments the millennium opportunity to fix their out-of-whack budgets taxing financial transactions. After all, as Jack Nicholson realizes, every problem is a business opportunity. Norberto
BTraven 07/30/2010
2.
And the next bubble will be created. Could it be that there is too much money available? It must be invested so new sectors worthwhile putting money into it must be found. Fortunately, Americans have a low saving rate otherwise the problem would even be bigger.
BTraven 08/02/2010
3.
Zitat von Norberto_TyrIf the XX was the oil century, the XXI will be the food century. Speculation with commodities has been known since long and it is highly profitable thanks to a dangerous zero sum game called futures. The XIX century revolved about full literacy (international 'news' agencies such as Reuter and Havas et al) tightly coupled with democracy, the XX century revolved around oil, the XXI will revolve around potable water, food’s footprint. Not for nothing the Hungarian-American currency speculator, stock investor, businessman, philanthropist, and political activist (as per Wikipedia 2010) entrepreneur Schwartz György alias George Soros “the man who broke the Bank of England” was caught buying large tracks of land in South America under anonymous Pty. Ltd. companies camouflage, specially within the River Plate basin, or around of what was called “La triple frontera” (“the triple border”), conveniently set by the British about post Napoleonic times (mid XIX century) in order to be able to trigger a conflict whenever was handy. As with Napoleonic wars, the entrepreneurial family of that times, the Rothschild’s, were involved in the financing of that holy ‘project’. In fact, the billiard flat and well-irrigated expanses of Argentina were designated by the fourth Zionist congress in 1904 as a place to set a home for the Jews, even though in the next congress, 1906, the Zionists switched the target to Palestine. Yes, in the XXI century the main commodity to be exported will be potable water, but not through pipes or tankers, it will be carried by food. Malthus was granted two centuries of rest due to the invention of the automobile by Daimler, the magnificent idea of autobahns and the concept of ‘a car for every person’, or at least a family. People forgot for a while about the Malthus effect (An Essay on the Principle of Population, 1798) stating that IF population growths exponentially while the production of food grows lineally the gap will increase to a point that will make feeding everyone impossible. That 'IF', the most important word (or concept I should say) plaguing ‘a priori’ with uncertainty our lives, climate change, gambling industry, pregnancies and so on vanishes ‘a posteriori’ demonstrating the fact that concepts are dead as fish floating on the surface of the water (as Schopenhauer would say), determines the future of the whole human race. The discovery by Justus von Liebig that adding nitrogen to soil can increase crops slackened the quest for potable water by both, the Rothschild’s’ family and US as well since oil offered a quickest chance to make easy profits. Now, 2010, the equation changed again, China and India have the challenge to feed thousand million people plus every single day regardless of climate conditions; this constraint places US in a similar situation as predicted by Malthus, even though the gap might not increase so sharply as originally predicted, there are enormous chances that things called by mathematicians as 'discontinuities’ might suddenly and unpredictably appear with catastrophic effects (natural and artificial, from the word 'art' or 'man-made'). Please forgive this digression and let me return to our topic, namely commodities speculation. In the famous 1996 movie “Mars Attacks!”, Jack Nicholson playing a Las Vegas gambling industrialist is inspired by the Martian slaughter of earth people recognizing that the Martians, acting like US, must have our same needs and desires as well (paraphrasing Professor Abraham Maslow et al), therefore they would surely be interested in both, pornography and gambling; thus, the Martian invasion was the millennium business opportunity (as was thought of Iraq and Afghanistan invasions). The commodities speculators surely did not missed that great movie, therefore they would not miss THIS business opportunity in order to make the most by means of gambling in the world's stock markets utilizing the most sophisticated mathematical models supporting the most extravagant financial 'products’, artifacts or concoctions, technically speaking. But, as we know, there is always a catch; this achievement might artificially make commodities far more expensive as they would be without vaporware tampering (buying and selling 'promises' between very unreliable people), thus triggering a snowball effect (feedback in the sense meant by Peter Senge), in turn presenting governments the millennium opportunity to fix their out-of-whack budgets taxing financial transactions. After all, as Jack Nicholson realizes, every problem is a business opportunity. Norberto
Soros would be the only business man buying fertile land in developing countries. Do you have a source for your information? Arab countries and China are about to invest heavily in Africa in the hope their future demand for agriculture produce can be met by deliveries from that areas. On the other side countries like Germany could still afford to declare soil which belongs to the most fertile as building land. EU farmers still produce surpluses which have to be sold cheaply to Africa because it costs much less than storing it butter and grain in large warehouses. It is a strange world.
margbb 08/24/2011
4. Choc Finger's Big Bet
Their doesn't appear to be any room for ordinary taxpayers in the existing global investment market or for that matter of consequence to their respective national governments. Since the tax system in each country sees fit to simply make its taxpayers pay for the activities of others, maybe its time we just opted out of a system that no longer represents or values us. There does not seem to be anything including the starvation of millions, that will impede agricultural speculation. The companies and banks that benefit see individual citizens as simple pawns to be bilked.
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