Thursday, December 8, 2011

Commodities: And Another Bubble Popped

If you are late for an appointment, blame it on the Euro crisis. If you forgot your wife`s birthday, blame it on the Euro crisis. If you blew your exam,  blame it on the Euro crisis. It seems everything can now be blamed on the Euro crisis.

The "Financial Times" does it in the case of the falling price of cocoa (minus 35% since begin of the year). They write "the sovereign debt crisis in Europe has claimed an unexpected casualty – the price of cocoa" (the article is called "Euro debt crisis bites into price of cocoa " ft.com, needs registration). Oh, really? Does anybody eat less chocolate because of the Euro crisis? And why did the price of oil  (WTI) rise around 30% since early October and the stock market (S&P) move sideways since summer. Why does the Euro crisis affect the price of cocoa, but not so much the prices of oil & stocks?

Maybe there is another explanation for the crashing price of cocoa. Maybe cocoa 
was just another bubble which has popped now. The rising cocoa price (until April) was part of a general boom in commodities. Oil, copper, wheat, corn and a lot of other commodities are traded on financial markets (represented by delivery contracts called futures) - like stocks, bonds and currencies - and are therefore influenced by speculations. The German magazine "Der Spiegel" (The Bittersweet Wars Battle Pits Cocoa Speculators against Chocolate Makers spiegel.de/international) quotes estimates, that speculation in the commodities markets alone entails somewhere between $400 billion and $800 billions. The prices of commodities are therefore strongly influenced by hedge funds, brokers and banks who are betting on falling or rising prices or just earn money with counseling & accomplishing the financial transactions.

Commodities in general had been rallying because of speculation that a rising demand, especially from emerging markets (because of rising incomes) meets a constrained supply. The price of cocoa got hot because of speculations that the crops won`t be enough to satisfy the demand, because of unfavorable weather conditions (to wet or to dry) and other factors.

Last year cocoa had hid a 33 year-high, reports the "Financial Times". The British paper tries to explain that with "a disappointing crop in the Ivory Coast – which supplies two-fifths of the world’s cocoa - caused by low fertiliser use and ageing trees, as well as worries that farmers would abandon plantations or switch production from cocoa to rubber". I like their use of the word "worries", which is just an euphemism for rumors and speculation, which are heavy influencing this markets. 

You could find a proof for this in an article by BBC News (bbc.co.uk). In July 2010 the hedge fund manager Anthony Ward bought contracts for about 240,000 tonnes of cocoa, enough to make more than five billion chocolate bars! This put other buyers, especially the producers of chocolate, under pressure. They had to fear not getting not enough raw material for their production.

Of course, Ward and other speculators where at least pleased by price driving news, where ever it came from. It was a strange coincidence that last winter in the Ivory Coast a civil war broke out. The conflict stopped the cocoa deliveries from this country and drove the price of cocoa to a new record, rewarding Ward & Co.  "Cocoa production in war stricken Ivory Coast will likely fall over the next two years", claimed the broker Macquarie last April (thejakartaglobe.com).

But the bank was wrong. The conflict ceased in April and the Ivory Coast came back on the cocoa market. Since then the price of the commodity is under pressure. This year Ivory Coast an other producers delivered  crops which where higher than last year and raised the supply of cocoa on the world market, rebutting all the rumors about insufficient harvests.

The rising crops weren`t really a surprise, they were quite natural. The farmers did, what ever they do when the price for their products is rising: They planted & fertilized more, because they expected more profit. This basic law of markets popped the bubble finally.

Cocoa isn`t alone. The situation reminds me of the rise & fall of the price of cotton (I wrote about that in November drivebycuriosity). And the prices of wheat and corn also are under pressure, because their harvests also are much bigger than the banks and speculators tried to hoax us (bloomberg.com). this is good news for the consumers, but bad for the friends of banks like Macquarie, who predicted in January that 2011 will be the year of rising prices on the market of agricultural commodities (The return of agflation commodities-now.com).

1 comment:

  1. Wow, great article, I really appreciate your thought process and having it explained properly, thank you!


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