One of the great hopes for some men in society is for science to develop a Viagra type pill to boost female sexual libido. I don’t know too much about it except for the fact that it is not here yet. I’m told the key to increased female sexual libido is the experience and a whole lot of other things I probably don’t understand. Then there is chocolate.
I bring this up today because some of you faithful readers are thinking about using chocolate to that ultimate end and there is somebody in Britain by the name of “chocolate finger” who is thinking of making that a lot more expensive. Still don’t get it? It just so happens that last week the fund manager for Amagario, a hedge fund which buys chocolate for a large Swiss manufacturer purchased 240,000 tonnes of cocoa beans and actually took delivery against the July cocoa contract.   Cocoa prices spiked on the news and then retreated later after it became known that a hedge fund manager bought the cocoa beans. Needless to say, “chocolate finger” is actually taking delivery of the cocoa beans, which represent about 7% of annual global production. That’s enough cocoa beans to produce 5.3 billion quarter pound chocolate bars. I just hope he has a wife and she enjoys chocolate.
For some of you this must seem mundane. I know myself I rarely eat chocolate and chocolate bars aren’t part of my life. However, I have known quite a few females in my life who love that late-night run for a chocolate bar. You would think after all that time that I might get the connection. I digress. It would seem that the hedge fund manager, Anthony Ward dubbed the “chocolate finger” is making an attempt to corner the cocoa market. By taking delivery of all those cocoa beans, he’ll be able to exert market pressure and make some money on the anticipation of rising cocoa prices. I’m sure that still doesn’t get any of you shaking in your boots, when considering buying that proverbial chocolate treat.
It just so happens that I picked up on this when I watched CNBC’s “Power Lunch” program last Monday. A friend of mine, Darin Newsom is a senior grain analyst with Telvent DTN and is often asked to appear on the big American business channels like CNBC. It just so happens that he tweets about this before it happens and I often catch his analysis on CNBC. So when I rolled through the digital images on my DVR, I caught Darin’s interview and to my surprise he was asked about cocoa and wheat. What followed was a two-way back-and-forth on the intricacies of the cocoa market and what in the world “chocolate finger” was doing. The CNBC commentators were obviously enthralled with this offbeat, delicious topic.
From my perspective what Darin said about wheat was far more interesting. Needless to say when you compare wheat against chocolate, or do you think wins out? Bad weather in Europe, Russia and Kazakhstan plus speculative money coming into the wheat market aren’t very sexy. However, what Darren intimated to me later was that both markets were broken and not necessarily working as you might expect.
That made me wonder what a “broken market” was?  I think from a purely analytical view it means that there are big differences between futures values in the commodity markets and their cash equivalents at the time of delivery. In other words futures values may not have any relation to cash prices and or specific market players might be trying to impinge an unusual pressure on the market by cornering its supply, like “chocolate finger”.   The wheat and cocoa market may be candidates for that.
My own experience with “broken markets” usually has to do with very unusual price movements. For instance in 1991 I was called to testify before the House of Commons standing committee on agriculture regarding an Italian company, Feruzzi which was forced to liquidate its holdings in the soybean market. At the time this caused a tremendous decrease in the price of soybeans. I also had an experience in Australia in another life where a friend of mine was working on a problem in a specific sheep market where prices just weren’t adding up.
My friend was a classmate who was working as an agricultural economist in Australia. He told me this one particular sheep market generated prices that didn’t make any sense. So I asked him the standard questions about volume of sheep, frequency of delivery and a host of other questions that should have added up to a problem. However, I left Australia before he knew the answer, I just knew that that particular market was broken and wasn’t working.
It is a rare event, but broken markets do happen and usually they happen with great fanfare. Free markets are great things but with the right set of circumstances they can be broken and abused. So watch those chocolate prices over the next few weeks. And if you have to make one of those late-night chocolate runs, be prepared to pay the price, whatever that may be.