A worker carries a sack of cocoa beans at a warehouse in Makassar in Indonesia's South Sulawesi province.YUSUF AHMAD
When British hedge fund manager Anthony Ward bought about $1-billion (U.S.) worth of cocoa beans last week, there was talk he was trying to corner the cocoa market and fears that chocolate lovers everywhere would face huge price hikes for their favourite treats.
But now it appears that Mr. Ward, dubbed "Choc Finger" by the British press, may have been forced to buy the beans to get out of his own market squeeze.
Analysts believe Mr. Ward ended up on the wrong side of a private hedging arrangement with Swiss chocolate-maker Barry Callebaut AG. As a result, Mr. Ward's firm, Armajaro Asset Management LLP, had to buy about 241,000 tonnes of beans last Friday on the NYSE Liffe, or London International Financial Futures Exchange.
The purchase was the second-largest ever on the exchange - and it was enough cocoa to make five billion chocolate bars. On Monday, reports surfaced that roughly half the cocoa had been sent off to Barry Callebaut and it is expected that most of the remainder will head to other candy-makers who had similar deals with Armajaro. Mr. Ward declined comment, as did officials at Barry Callebaut.
"It sounds like maybe when they designed that deal they didn't design it right," said Sterling Smith, an analyst with Country Hedging Inc. in St. Paul, Minn. "Fewer than 2 per cent of all futures contracts everywhere ever get delivered on. And a hedge fund certainly does not want to take delivery."
Private hedging arrangements are common in commodity trading, especially for a firm like Armajaro which is one of the world's largest cocoa traders. What is extraordinary is that Armajaro ended up taking delivery of so much the cocoa. Futures markets are used by growers and food companies to lock in prices, not to buy the actual product. Typically when a monthly futures contract is set to expire, buyers and sellers cover their positions. Anyone who wants the actual product then turns to the cash market.
There had been speculation for weeks about the July Liffe contract, which expired last Thursday. As rumours swirled about a big buyer of cocoa, the price of the commodity soared. It reached a 33-year high Friday of £2,732 ($4,388) per tonne.
Over the weekend, British papers reported that Mr. Ward's fund was the buyer, creating speculation about a possible attempt by Armajaro to corner the market. But when news surfaced Monday that nearly half of the cocoa had been unloaded to Barry Callebaut, analysts and investors became convinced the purchase was to cover a deal. The price of cocoa fell sharply, dropping Monday to £2,345 on Liffe and falling $184 (U.S.), or 5.8 per cent, to $2,981 on the ICE Futures U.S. in New York.
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Mr. Ward has made big bets on cocoa before. He has been in the cocoa trading business since 1980, rising through the ranks of Phibro Inc., a U.S.-based commodity trading firm once owned by Salomon Inc. At Phibro, Mr. Ward became the chief cocoa trader and once controlled 40 per cent of the market. He left that firm in 1998, when it became part of Citigroup, and co-founded Armajaro. The privately-owned firm has five funds devoted mainly to agriculture products, including one that specializes in cocoa and coffee. In 2002, Mr. Ward bought up 204,000 tonnes of cocoa, forcing some chocolate bar makers to raise their prices.
His latest purchase has raised questions about Liffe and its regulations. The London market is considered less-regulated than ICE Futures and earlier this month 16 European cocoa industry participants wrote Liffe complaining about speculators driving up the price. The exchange has agreed to look into their concerns.
Paul Waldie