Cocoa speculators are not evil
Friday, August 13, 2010
Antony Ward, head of hedge-fund Armajaro, has been maligned recently for buying up 7% of the world’s cocoa bean production. The tabloid press, quick to jump on the banker-bashing bandwagon, have started referring to him as “Chocfinger”. This move has prompted further calls for protectionist policies to prevent further speculation from the anti-poverty group World Development Movement.
Such policy prescriptions are irrational and unhelpful. As The Economist explains, Ward has predicted that cocoa bean production will slump quicker in the Ivory Coast (the world’s largest supplier of the commodity) than has been generally acknowledged. A sudden shortage of cocoa supply will raise prices on the international market.
Such an eventuality could be avoided provided that there are already reserves waiting to be sold if production falls. By buying up such a large quantity of cocoa and storing it in refrigerated warehouses, this is precisely what Ward has aimed to do. Providing his calculation is correct, the result is a win-win situation where he makes a profit and prices remain relatively stable as supply levels are maintained to meet demand for the commodity.
Furthermore, the claim that speculation is the cause of price volatility is getting things the wrong way around. Price volatility is caused by many factors including the inherent unpredictability and time lags involved with growing cocoa, but also the fact that the vast majority of the world’s cocoa is grown in some of the world’s least business friendly environments, which stifle the incentives to invest and can make production much more irregular than it would otherwise be. For instance, around 40% of the price paid on the international marketplace for cocoa goes directly into the pockets of Ivory Coast’s government, which regulates pesticides and undermines the property rights of cocoa farmers. These counter-productive policies only make supply more irregular and thus the speculators are drawn in.
Let us be clear: speculators react or try to pre-empt price fluctuation but they aren’t responsible for it.