Trader's stockpile of cocoa puts the squeeze on supplies
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Your support makes all the difference.A London-based trader is sitting on at least 5 per cent of the world's cocoa output after making a massive bet that prices for the crop will continue to soar.
It has emerged that Anthony Ward, a 20-year veteran of the business, has cornered the cocoa market after taking physical delivery of most of the 200,000 tonnes that was tendered for the July contract at the Euronext Liffe exchange. It was one of the biggest quantities of cocoa physically delivered on the exchange, equivalent to about 7 per cent of world annual supply. Mr Ward took 148,000 tonnes of the tender.
Mr Ward, the founder of Armajaro and a former head of trading at the trading house Phibro, said: "We believe there is a structural deficit and that demand will outstrip supply for a while yet, certainly next year [the 2002-03 cocoa season] and possibly the year after."
The Armajaro move, financed by bank borrowings, has set up a squeeze of cocoa and, with all the surplus cocoa around having been swept up, those holding short positions have been left exposed.
Cocoa prices have risen nearly 80 per cent over the past 10 months to 15-year highs of more than £1,300 a tonne. This followed two poor harvests in the key West Africa growing region and speculative buying. This has caught out many traders and the chocolate industry, which failed to build up sufficient stores when cocoa was much cheaper. Three years ago, the commodity was sagging at 27-year lows.
"We expect prices to go higher by the middle of next year," Mr Ward said. "Why not £1,500 or £2,000 [a tonne]?"
Jean-Michel Boehm, cocoa relationship manager at ABN Amro in London, said: "You wouldn't have a squeeze if the fundamentals weren't moving with you. We've had two successive deficits. We will know very soon if there's going to be a third, which would be unprecedented. If that happens, it's going to be very painful."
Mr Ward has built up his long position on Liffe over the past six to nine months, at an estimated average price of some £1,000 a tonne. One rival trader called it a "once in a lifetime opportunity" for him to make a "killing".
The trader said: "And if he [Mr Ward] decides to take September as well, there's going to be trouble, with the shorts having to scramble around to find more cocoa. This business is all about getting the timing right. All the bits of the puzzle are coming into place for him."
The 2000-01 cocoa season saw the largest shortfall in supply ever recorded, at 247,000 tonnes. The deficit for the 2001-02 season, which ends in September, is forecast at some 100,000 tonnes. Mr Ward's gamble is on the 2002-03 crop and initial estimates of its size will start to come through in the next few weeks.
Amarajo's cocoa will be stored in warehouses and some of it will be supplied to chocolate manufacturers. "I'm not a speculator. This is my core business," Mr Ward said.
But no market is a one-way bet. In 1996, when Mr Ward was at Phibro, he took out an even bigger long position, at about 300,000 tonnes, but the cocoa price languished after the Ivory Coast crop came in better than expected. Phibro was later forced to unwind the position. Some analysts believe the current cocoa price rally will soon run out of steam.
Matt Parry of the Economist Intelligence Unit said: "Prices rises stimulate production so I expect the price to start to come down over the next couple of years. I wouldn't start stockpiling chocolate bars."
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