Anthony Ward, founder of London-based commodity hedge fund Armajaro Holdings, not only gave new meaning to the phrase ‘putting your money where your mouth is’ last week when he took physical delivery of 240,000 tons of cocoa beans following a $1b bet in London’s NYSE Liffe (limitless) futures market on July contracts the fund then held to expiration–but also, per John C. Thomas over at Diary of a Mad Hedge Fund Trader, evoked memories of “fabled economist John Maynard Keynes, [who] once rented all the available warehouse space in London to avoid taking delivery of a bad position in copper.”

Chart: Cocoa futures price

So what’s on Ward’s mind precisely?  Prices following the stunt hit a 33-year high of £2,732 per ton, and moreover have been on an upwards tear the past two years in particular (see chart, above) on the back of poor harvests and what Ward sees as increasingly diminishing production quality in Ghana and moreover the Ivory Coast, which is accountable for approximately 40 percent of a given year’s annual crop is grown (see chart, below).  And while manufacturers have hitherto responded to this market dilemma by raising prices, manipulating portion sizes and altering recipes, such measures are surely just a stopgap, especially given the increasing demand from relatively newfound and ever-burgeoning consumption in countries like China.

Chart: Global cocoa production

Per an exceptional and indepth FT article from late May, for instance:

“Cocoa trees are getting old and sick, and a byzantine world of smallholder farmers, corrupt politicians and travelling middlemen is resistant to change . . . unlike almost every other major agricultural commodity – corn, ­coffee, palm oil, sugar – the world’s cocoa is still grown overwhelmingly by smallholders, each owning less than four ­hectares of land. The task of increasing production does not lie with the managers of big agribusiness plantations, but in the individual actions of thousands of mainly poor west ­African farmers.”

The piece lays out in the depth the incredible challenge facing the cocoa industry going forward, from Nestle’s aim to replant 12 million trees over the next decade which will be more impervious to disease and able to yield quicker, to efforts by trading houses to go out into the country to improve farming and fermentation methods, and finally to the volatile political backdrop–where onerous cocoa levies line coffers but also dissuade production.  Thus, while the long-term looks opaque, the present price trend is clear, according to Jürgen Steinemann, chief executive of Barry Callebaut, the chocolatier supplying many of the world’s top foods groups: “At this moment, cocoa is a scarce material: demand has been rising, supply has been stable, so prices have gone up.   [And] there’s no fundamental reason why cocoa should become cheaper.”

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