Hasso Nauck lives in a world of things that look and smell beautiful. He collects antique cars and plays golf, and his workplace is filled with the scents of chocolate. As he sees it, it's the best chocolate in the world -- because he makes it. Pralines, cocoa truffles and chocolate-covered "ginger tips" are only three of the 110 items in the product line of Hachez. The traditional chocolate maker calls its product "chocolade," a mix of the French and the German words for chocolate.
Nauck has been at the helm of Hachez, based in the northern city-state of Bremen, for the last 20 years. Although the chocolate business has always been relatively straightforward, this last year has seen some strange things happening.
For example, Nauck recently had to sit back and watch as a civil war erupted in Ivory Coast because two men couldn't agree on who was president. A man named Alassane Ouattara, the country's newly elected president, issued a ban on exports and took the country's cocoa off the world market, though it meets roughly 35 percent of global demand.
When Nauck got into the chocolate business more than 30 years ago, the market was still a trader's market; it was straightforward and easy to understand, and cocoa prices followed the rhythm of the harvests. But now Nauck could see how unrest in a faraway country was causing raw cocoa prices to skyrocket. At least for now, that was the peak of the turbulence. But it all began much earlier.
An Attack out of Nowhere
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.
The price of raw cocoa reacts to news from producing countries and the sizes and quality of harvests, but it also reacts to rumors. That is why there are always speculators on the cocoa exchange in addition to traders and chocolate makers, people like Ward in addition to people like Nauck. The former make bets on whether the price of cocoa will go up or down, gambling on whether there will be a surplus or a shortage of the commodity.
In trading terms, someone who believes that prices for a commodity like cocoa will rise is said to be "going long." He orders the commodity for delivery at a later date, but at today's price. In doing so, he hopes to secure an advantage by being able to resell it at a higher price when -- as he expects -- it gets more expensive. Someone who goes long anticipates scarcity.
On the other hand, someone who expects prices to fall is said to be "going short." He sells a commodity for delivery at some point in the future, but at today's price. In doing so, he hopes to be able to buy the commodity for resale at a lower price in the future. If he's right, his advantage is that he is locking in the current, high price before the commodity's price goes down. Someone who goes short anticipates a surplus.
Looking back, it would appear that Ward knew exactly how to bet on the price of cocoa because he knew for sure that it would become scarcer. And he knew this because -- conveniently enough -- he was actually the very person to make it scarcer in the first place. Indeed, Ward behaved like someone who sees a long line in front of the bakery on a Sunday morning and buys 400 rolls, only to resell them to the people waiting outside at double the price.
A Simple Game in a Complex World
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.
The Cocoa Trap
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.
Ward did this by buying thousands of cocoa contracts at the current daily price for delivery at a later date, when the price would presumably be higher. He was going long, betting that cocoa would become scarce. And he did his utmost to ensure that this would be the case.
On the London exchange, other speculators also started believing that cocoa would become scarce based solely upon the fact that Ward was going long. Asset managers, hedge funds and the fund managers at major banks also went long, betting that the price would continue to rise. In doing so, they drove it up even further. They also increased the share of cocoa in their overall commodities funds. The true value of the cocoa was no longer relevant; only the presumed value was.
Ward had set a trap. The bait was the attractively high price on the exchange, which allowed the traders to forget that they earn their bread and butter from the chocolate manufacturers. In the words of one trader, the price was as attractive "as two Swedish nymphomaniacs standing outside a gas station at night." The traders forgot their traditional customers and sold their cocoa on the exchange -- where Ward was waiting for them.
Ward apparently had to disguise his simple plan with red herrings. To cover up his tracks, he had several different brokers handle his buying orders. He pushed positions back and forth. And he juggled with the expiration dates, sometimes going long and sometimes going short. Or at least this is what everyone who was caught off guard by Ward's tactics says. Ward, who has decades of experience in the market, masterfully used the instruments of the exchange to deceive the market. And it was all completely legal.
Insiders estimate that Ward purchased about 50,000 futures contracts in the spring of 2010 alone, at an average price of about £2,300 a ton. Each contract entitled him to take delivery on 10 tons of cocoa, for a grand total of 500,000 tons of cocoa.
By mid-June, Ward probably owned futures contracts for more cocoa than was available on the exchange. Unfortunate speculators had bet against him in anticipation of falling prices. But now Ward had them in what market insiders call a "squeeze."
This betting game is virtual. Its currency consists of claims, sometimes even claims to claims held by a third party. But it can still have a dramatic impact on the real world -- and on people like Nauck and those of his competitors who were not well stocked and were now starting to panic.
Nauck can try to buy cocoa at a good price. To do so, he has to pay attention to daily prices and to minute-by-minute fluctuations. But this only takes time away from what he really wants to do: make high-quality chocolate.
In the last two years, he has streamlined production, cancelled Christmas bonuses, waived his right to a significant share of the profits and, after lengthy negotiations with the works council, implemented cost-cutting measures among employees. For example, one worker now operates a stamping machine that was previously operated by both a technician and a machine operator. Nauck knows that the day could arrive when chocolate production is no longer profitable for Hachez.
The Grind Statistic
According to sales figures on the London exchange, at the beginning of July, Ward still owned about 24,000 contracts, each for 10 tons of cocoa. At that point, he could have closed out his positions by selling them and collecting his profits.
Or he could have waited. He could have gone all out and held the contracts until their expiration dates and then taken delivery on all the cocoa. The key question were: What would happen to demand? And would he be able to sell all the cocoa?
No one knew. Still, there is one critical number in the industry that can indicate demand. Once every three months, the Brussels-based European Cocoa Association (ECA) publishes the so-called "grind statistic," which indicates how many tons of raw cocoa are being ground into "cocoa mass," or paste, to actually make chocolate.
Three large companies dominate the global market for processing raw cocoa into cocoa paste: Barry Callebaut, Cargill and ADM. These big three have giant warehouses, and only they know how much cocoa paste they have in these warehouses. Indeed, by controlling the amount of cocoa mass stored in their warehouses, they control a large share of the demand for cocoa.
During the economic crisis, the grind statistic declined. Since consumers bought less chocolate, the industry processed less cocoa. The grind statistic increased in the first quarter of 2010 and, again, in the second quarter. The second-quarter statistic, which was published on July 14, must have confirmed Ward's suspicion that demand was up. If his plan was to corner the market, now was the right time to do it.
The Trap Is Sprung
On July 15, when the contracts expired, Ward took delivery on 240,100 tons of cocoa. And although the cocoa remained in the exchange warehouse, it was now his. It constituted about 7 percent of the annual global harvest. It was a bold move. He now owned vast amounts of cocoa. Ward hoped -- and many experts expected -- the price to continue to rise, to £3,000 or more per ton. If that happened, his plan would work out spectacularly in his favor.
But the price didn't rise. In fact, instead of rising, it began to fall. Within only one day after Ward had taken delivery on the 240,100 tons, the cocoa price fell by 3 percent in London, and it continued to fall thereafter. Within the first four weeks, it was down 13 percent.
Ward had no alternative but to wait it out. But every day was costing him money. For cocoa worth an estimated €775 million, and at an interest rate of perhaps 3 percent, he would have been paying about €1.9 million in interest every month and another €1.7 million in storage costs.
In early October, the number was released that Ward must have been pinning his hopes on: the grind statistics for the third quarter. But something had happened that no one in the industry had expected: At 331,192 tons, the figure was even lower than the grind statistic for 2009, the year of the financial crisis. Indeed, it was the worst figure in four years of steady increases. The big three were apparently reducing their unexpectedly high inventories of cocoa paste.
Saved by Civil War
The number sealed the fate of Ward's plan. What he needed now was a miracle. But what he got instead was a civil war.
In late November, Alassane Ouattara was declared the winner of the presidential election in Ivory Coast. But his rival, President Laurent Gbagbo, refused to abandon the presidential palace, leaving Ouattara no choice but to run the country from his hotel. Then fighting broke out and cocoa exports broke off. The raw cocoa sitting in the port of Abidjan was not being shipped. This drove up the price of cocoa to £2,400 per ton.
Things have since calmed down in Ivory Coast, and cocoa prices have once again fallen. But no one but Ward knows whether the turmoil protected him against a loss or helped him make millions with his massive speculation. He may have sold his cocoa too early, or he may have kept his cool and waited for the right time. Unlike the New York exchange, the London exchange does not require its traders to disclose the details of their deals.
Nauck was lucky. He bought his raw cocoa at the moment when the price reached its lowest point, £1,900 a ton. Though he made his move at the right moment, he knows that -- just like the cocoa farmers in Ecuador and West Africa -- he is still a hostage of the market.
Efforts to Make the Game Fairer for Farmers
Yayra Glover has not been involved in this game until now, but he might just be able to change the way it is played. With his shirt untucked, Glover is driving a dust-covered Mahindra SUV along a red dirt road from Accra to Suhum, in Ghana.
Glover studied law and philosophy in Zurich, Switzerland. He eventually packed his books -- Kant, Max Weber, Che Guevara -- into a few boxes and boarded a plane to his native Ghana with dreams of radically transforming the cocoa trade.
Glover's idea is to give the farmers a bigger share of the profits. In doing so, he hopes to encourage them to stop selling their harvests to either the big, international traders or the exchange. Instead, he wants them to sell to him and at fair prices. With this strategy, Glover wants to drive international corporations -- and people like Ward -- out of Ghana.
Likewise, Glover wants to give the farmers self-confidence and order. He wants to make them strong and independent enough to no longer have to depend on the traders and to be able to sell their cocoa directly to manufacturers in the industrialized world, instead.
Glover has found a partner in Switzerland who has agreed to buy his cocoa at higher prices. In doing so, they have established a "fair-trade tunnel" between Suhum, in Ghana, and the Swiss town of Schwyz, where Glover's partner is based. By going this direct route, they shield themselves against speculators like Ward.
In fact, Nauck and Glover are natural allies and would make perfect partners. With consumers on their side, they would be unbeatable.
Dreams of a Better Future
It is early afternoon when Glover reaches Suhum. The path to the flat-roofed building where he lives and works winds up a hillside, past banana trees and construction sites.
The office at the front of the building holds three employees sitting at small desks with computers. The bedroom Glover uses when in Suhum is in the back. The room has a wooden bed, a stone floor, two ceiling fans and a few boxes of organic pesticide stacked in a corner. Next to the bed is a framed photograph of his four children, the youngest of which is eight.
The room next door is his office. A long dark bookshelf runs along an entire wall. Lining the shelves are 87 red-and-blue ring binders, each of them carefully labeled.
"It's a little Swiss, isn't it?" says Glover with a Swiss accent.
Glover's filing system includes details on roughly 2,500 farmers from the Suhum region. Everything he knows about them is collected in the ring binders: how much land they own, how many cocoa trees they have and how much they harvest. The binders also contain statistics on fertilizer use, contracts and correspondence with the cocoa authorities.
Glover's office serves many different purposes: as a notary's office, a land registry office, an administrative office and an archive. He says he keeps these records so that they can know where they are and who they are. He sees the future of the farmers of Suhum gathered together in ring binders on a bookshelf.
Last year, Glover bought 500 tons of cocoa from the farmers in Suhum at fair-trade prices, which are a little higher than prices on the open market. Next year, he expects to buy about 2,000 tons. Compared with Ghana's annual harvest of 800,000 tons, 2,000 tons is a drop in the bucket. But it's still a beginning.