Market chocoholics: what is driving cocoa mania?

In Kent, a small team at Artisans du Chocolat already see their commodity as a form of liquid brown gold.

Their premium British chocolates are a fair whack more expensive than a Kit-Kat: but thanks to financial speculation of cocoa beans, and stockpiling in warehouses around Europe, perhaps we should all be getting rather used to more expensive chocolate.

What’s turning the world of chocolate upside down are the actions of Anthony Ward, aka “Chocfinger”, who runs the commodity trading group Armajaro. On Friday he bought chocolate worth £650m for the world’s largest chocolate bar.

That’s an amazing 7 per cent of the world’s annual output, the largest single delivery in 14 years on the London futures market, and almost all the physical supply on the main London exchange. Even so, cocoa prices were down on Monday by more than 3 per cent. So is this a smart investment or speculation?

Unlike pure speculation, Mr Ward is actually taking delivery of this massive quantity of cocoa, equivalent to all the physical stock on the main London exchange.

He isn’t making any comment, but in a rare interview last year with hedge fund TV station Opalesque, available on YouTube, he explained what was behind his fund.

“All of you would have had our product,” he said, also explaining that his approach is rooted in predictions about scarcity, not just of cocoa, but of food and of water in general.

“The global population is growing at an enormous rate – food and water are going to be in shortage. Everyone’s concerned about energy, they should be concerned about water.”

At Artisan du Chocolat’s factory in Ashford, Kent, they are feeling the crunch of a 150 per cent rise in cocoa prices in the past 18 months.

While the prospect of higher prices for posh chocs might not be the most damaging of economic crises in the world today, campaigners for the West African cocoa farmers that provide most of the world’s supply say that they are the last to benefit from high prices and speculation.

Over the past two years various essential food commodities, as well as cocoa, have seen curious price surges, yet government and the UK financial regulator have repeatedly asserted it’s nothing to do with the City. In the US traders have pointed to a so-called London loophole in speculation.

It’s right to point out that the current structure of the market in many commodities, coupled with low interest rates, mean that it may be rather rational to hoard commodities.

Cocoa can be stored for years in the correct conditions. And if the expected price rise exceeds the cost of storage then there is a profit to be made. A similar phenomenon could be seen with the so-called “sharks” spotted off the English coast earlier this year, hoarding oil whilst petrol prices rose.

Izabella Kaminska at FT Alphaville has an excellent explanation of the economics of commodity “contango” (an upward sloping forward curve in the markets).

When the dotcom bubble burst, then followed the housing bubble, and consumer credit boom. When both faltered it is perhaps little surprise that the big guns of world finance turned to commodities.

Set against the ephemeral world of dodgy mortgages and adjustable credit, the raw certainty of materials that can be mined, grown or harvested is rather attractive. Indeed, 18 months back one of Wall Street’s most legendary investors, Jim Rogers told me to become a farmer, as farmers “would be driving Lamborghinis, and bankers would be driving taxis” as the economy changed in the years after the banking crisis.

So are people like Rogers and “Chocfinger” really speculating? Or are they fairly positioning themselves for a world of agricultural commodity price rises, so called “agflation”?

It’s difficult to say where one ends and the other begins. But the FSA and the Treasury have been far more willing to defend these practices than even to question them. An assault on the chocolate market is unlikely to change that.