The Bittersweet Wars: Battle Pits Cocoa Speculators against Chocolate Makers

By Hauke Goos and Ralf Hoppe

Part 2: A Simple Game in a Complex World

Photo Gallery: Cornering the Chocolate Market Photos
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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.

A Delicate Balance

This development made adversaries out of two people who have never met. The world of one of them, Anthony Ward, is virtual. But the world of Hasso Nauck -- his company, his chocolate, his employees -- is real. He buys his raw cocoa in Ecuador because that's where the high-quality variety he needs is grown. But when the market price for cocoa goes up, the high-quality variety also gets more expensive.

Every day, workers at the Hachez plant in Bremen mix up products like the company's trademark "Brown Leaves." The 75 pieces, or 150 grams, of chocolate with a bittersweet aroma come in six different leaf shapes in metal tins that go for €6.50 apiece. Each new batch is finely adjusted by senior chocolatier Karsten Schnäckel.

"Brown Leaves" contain 77 percent cocoa. A high cocoa content is essential for chocolate of such high quality, and it naturally affects its flavor. But it also makes it susceptible to attacks by people like Ward. Indeed, when the price of cocoa goes up, Nauck can't just tinker with the ratio of ingredients, like adding more milk, sugar or butter. Instead, he just has to pay higher production costs.

The chocolate maker Mars has annual revenues of $30 billion, and the German brand Milka, owned by Kraft, has $49 billion. Compared to them, Hachez is a tiny operation, a mid-sized company with about 450 employees and annual sales well below the €100 million mark. Many Hachez employees have spent their entire working lives at the company, and 40-year anniversaries are not uncommon. Nauck says that these are the people he feels responsible for.

A Ripe Time for Attack

The adversaries in this duel were fighting with unequal weapons, and Ward was the more flexible combatant. His goal was to make cocoa scarce and to own as much of it as possible so that he could resell it for as much as possible.

His company, Armajaro, has the right kinds of people for such operations. It employs scouts known as "pod counters" in the key cocoa-producing countries. They regularly inspect the plantations, recording the number and sizes of the fruits and the condition of their trees. Ward has even had his own weather stations built in West Africa and elsewhere.

Last summer, it seemed like the right time for the attack had come. There were several reasons for this: First, after the real-estate bubble burst in the United States, there were billions floating around the world searching for new places to be invested. Second, in a developing short-term trend, demand for chocolate and cocoa was growing because the European economies had recovered from the financial crisis. And, lastly, since the cocoa trees in Ghana and Ivory Coast -- the key producing countries -- are getting too old, there had been several bad harvests in a row, and another bad harvest would reduce the supply even further.

Although cocoa is traded throughout the year in London, the contracts only come due on five dates: in March, May, July, September and December. The July date made the most sense for Ward's attack because chocolate makers like Hachez start producing for the Christmas season in the summer. At that point, the high price of cocoa was already a serious problem for Nauck. Hachez can only pass on the higher prices of its raw materials to consumers to a limited extent. Indeed, chocolate is even more subject to a so-called threshold price than other products. Even the youngest consumers are aware of this threshold, and retailers are vigilant about not exceeding it.

Everyone agrees that chocolate ought to be more expensive. But it can't -- or consumers will simply stop buying it. For Nauck, this means that a rising raw cocoa price eventually becomes a threat to his company's very survival.

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