© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
November 26, 2012 3:56 pm
Cocoa has long been a commodity market known for its large swings. Prices have often rallied, only to plunge soon afterwards in a series of boom-and-bust cycles.
The volatility has made millions of pounds for some hedge funds, creating trading legends such as Anthony “Chocfinger” Ward, co-founder of commodities house Armajaro.
Not this year. After years of rollercoaster prices, cocoa has been trading in a narrow band of between £1,400 and £1,700 a tonne. The slim trading range is in sharp contrast to the past two years, when it surged to a 30-year high of £2,465 a tonne, only to tumble a few months later to £1,287 a tonne.
Cocoa prices have not rallied this year by more than 8 per cent over a single month, nor dropped by more than 4 per cent. In the past decade, the market has seen monthly rallies of 30 per cent and suffered monthly price collapses of 20 per cent.
The lack of volatility has limited the trading opportunities in the cocoa market, long a niche of the commodities industry and often seen as the realm of just a handful of experienced physical traders and specialist hedge funds.
“People who were willing to play the [narrow trading] range did quite well, although not many did that,” says one fund manager in soft commodities.
Although the year has seen the occasional price rally caused by worries over production in the key supply region of west Africa, the usual big fluctuations have been largely absent. There are two reasons for cocoa’s new-found stability.
The first is the new system that Ivory Coast, by far the world’s largest producer, uses to sell its crop. Until this year, exporters, including top trading houses such as Cargill, Archer Daniels Midland, Barry Callebaut, Olam and Armajaro, had been free to buy and sell the commodity with the price dictated by the market in London.
This fully liberalised system, which left farmers exposed to the international cocoa price set in London, came under the auspices of the World Bank in 1999. Critics have blamed the system for causing extra volatility as the private sector sold large chunks of the crop at the same time, usually near the start of the harvesting season in October and November, moving the market.
Under President Alassane Ouattara, who came to power last year, the Ivorians have reintroduced a centralised system. The new Ivorian regulator, the Cocoa & Coffee Council, has since February sold forward its 2012-13 crop, which started to be harvested last month. The regulator has smoothed out the sales over about nine months, compared with the burst of selling typical under the older system.
Paul Davis of Holland Capital, an investment manager, says Ivory Coast has created a “completely stable system”, surprising the industry.
Justin Grandison, head of cocoa brokerage at ABN Amro in London, adds that the “usual hedging pressure associated with this time of year” – referring to the start of the harvest in west Africa – is not present, reducing price swings.
The lack of volatility has had a knock-on effect on the use of derivatives, in particular options used to hedge against extreme price movements. Jonathan Parkman, co-head of agriculture at commodities broker Marex Spectron, says: “We’ve been used to high volatility levels. That has come off significantly.”
The second reason behind cocoa prices’ stability is two years of supply surpluses, which have allowed chocolate manufacturers, the main users of cocoa, to stock up and reduce the risk of finding themselves without supplies.
The market endured three seasons of shortages until the end of 2010, reducing the amount of cocoa that chocolate manufacturers had to hand to about two to three months of supplies on average, making them vulnerable to squeezes.
However, in the 2010-11 crop season, the cocoa market had a huge surplus of 340,000-440,000 tonnes, followed by a 40,000-80,000 tonne surplus in 2011-12, according to industry estimates. Global cocoa production is about 4m tonnes.
Barry Callebaut, a leading cocoa processor, said this month that the “industry was well covered”. Cocoa traders believe chocolatiers have stocked up to seven months worth of consumption, double what they had two years ago.
The healthy level of stocks is a far cry from 2010, when chocolatiers worried the market was about to experience severe shortages. “The risk to the chocolate manufacturers has been drastically reduced,” says Mr Parkman.
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in