Phibro Takes On Willy Wonka: Chocolitango In The Futures Market Reeks Of A Physical Squeeze Attempt

Tyler Durden's picture

It appears that a Phibro/Buffett-inspired attempt to corner a commodity market is in progress. Amusingly (or not so much for chocolate mousse cake makers), it is occurring in the relatively compact and illiquid cocoa market, where the WSJ reports ten brokers (mainly BNP Paribas) took possession of more than 240,000 tons of cocoa, valued at as much as
$1 billion, leaving just 6,710 tons available for purchase. The Telegraph adds some further color: "The cocoa beans, which are sitting in warehouses either in The
Netherlands,
Hamburg, or closer to home in London, Liverpool or Humberside is
equivalent
to the entire supply of the commodity in Europe, and would fill more
than
five Titanics. They are worth £658 million." This is nothing less than an attempt to squeeze existing shorts, with an emphasis of the on the run, July contract. Indeed, the backwardation between July and September has surged to 11%, even as the settlement price on the continuous front-month, closing at $3,165, approaches all time highs: "Thursday, cocoa for July delivery settled at £2,732 ($4,221) a metric
ton. Friday, the new front-month contract, for September delivery, rose
1% to £2,445 a metric ton." And that's not all: "Already, cocoa for September delivery is trading at a big premium to
December cocoa, sparking talk that another run on inventories may occur
when the September contract expires." In other words, with half of America beckoning diabetes with open arms, a rather sharp bout of inflation is about to be felt for all those whose daily calorie intake is over 2,000. Incidentally, this is precisely the kind of action that would happen if and when someone had the urge to pull a Buffett and send the price of gold and silver through the roof (and destroy JPM and the LBMA in a matter of hours).

From the Telegraph:

Eugen Weinberg, an analyst with Commerzbank, said: “For one buyer it would likely be a little bit too large. It would be a crazy number. That said, if you’re cornering the market ...”

“If it looks like cornering, feels like cornering and the price difference between Europe and the US is so large, it probably is cornering.”

“There is some play taking place. No one really knows what is going on.”

Andreas Christiansen, president of the German Cocoa Trade Association, said the “hefty” price move was “a mirror of what can be done if people control the physical stock”.

Cocoa prices, which had been on the rise this year, rose 0.7 per cent yesterday, to £2,732 per metric ton. By contrast, cocoa being traded on the US exchange fell.

This is the highest price for cocoa in Europe since 1977, and comes after a series of weak harvests in Ghana and the Ivory Coast, the main areas where the crop is grown. Fears of floods in the Ivory Coast have sent prices even higher, as speculators have bet on another poor harvest, and a shortage of supply.

All those craving Viennese mocha will likely see a doubling prices imminently:

There are fears that the extraordinary activity on the commodity markets
will
filter down to higher prices on the shop shelves for the nation's
favourite
chocolate bars, even milk chocolate, which has only 25 per cent cocoa
content.

The WSJ adds:

End users of cocoa, such as confectioners, have been reluctant to
replenish supplies amid high prices. Now, they may have to, said Andreas
Christiansen, chairman of the German Cocoa Trade Association, a trade
group that represents 28 members of the cocoa industry.

Of course, this being pure speculative manipulation, only a handful of hedge funds and prop desks will benefit, even as prices go up, without benefit to the end suppliers:

Barbara Crowther, a spokesman at the Fairtrade Foundation, said that no
farmers in West Africa would benefit from the higher prices. She said:
"This
speculation only serves to increase volatility and uncertainty. Part
of the
problems in rent years have been the lack of investment in improving
cocoa
farms. But the farmers have already been paid a set price – none of
this
money will filter down to them."

Naturally, the CFTC sees no problem with this, just as it sees no problem with position limits, and the ability of 10 brokers to corner 99% of available physical market.

Trade groups have criticized the exchange because it hasn't implemented
limits on the number of contracts a single trader can hold, which in the
U.S. is regarded as a key check on participants' ability to manipulate
prices.

While the cocoa market is small and relatively unpopular within the speculative community, it is only a matter of time before this action is repeated for increasingly more popular and liquid products, until it finally strikes the tungsten motherload, rusty or not: as Buffet did it successfully in 1997, there is no reason to believe the next generation's physical squeeze play is not already in the works, especially with free money being so much more accessible these days, courtesy of discount window access for everyone.

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Muir's picture

Thast's what happens when there's too much money to play with.

tunaman4u2's picture

Exactly, we all know how this endless liquidity game ends... Wall St owns the majority of commodities. End product demand crashes as people can't afford it. Price still remains high regardless of demand.

Like Fed is doing with housing, oil, gold etc.

Hdawg's picture

In conjunction with the USDA

a bit dated but still a relevant report http://www.marketskeptics.com/2009/12/2010-food-crisis-for-dummies.html

i was just reminded this maybe part of the GM food agenda.

 

Oh regional Indian's picture

Exactly Hdawg.

Exactly. There is a food crisis of historical proportions staring us in face as it is. Forget all the inclement weather and general imbalance that is predicted for later this year.

Low food stocks..... poor weather.....

Like the walls closing in, imperceptible earlier, very perceptible now.

ORI

http://aadivaahan.wordpress.com

SamThomas's picture

Is it legal to try to corner a commodity?  Serious question...

strannick's picture

 

 

Good question. Unfortunately it comes down to the CFTC's interpretation if a party is unfairly trying to influence the market, whatever that means.

It was illegal for the Hunts in 1980.

Its just part of market liquidity if your JPMorgan in 2010.

I believe Gary Gensler is actually going to do something about this, now that his power is more consolidated.

unwashedmass's picture

 

and with regard to gold and silver....we are naive enough to believe it will never happen......

at this point, given the danger the JPM short position in gold and silver represents national security-wise, forget just the lunacy, the blatant manipulation of prices and the illegality of it,  i'd think that there would be people talking about the possibility of treason charges.

it makes us insanely vulnerable....it will -- when it explodes on JPM -- take down JPM, the economy...and possibly our country.

tenaciousj's picture

would it be treason if they are doing it on behalf of the the gov?

JLee2027's picture

...enemies domestic and foreign...this is in every oath the military and our political leaders take.  So, yes, absolutely.  

rsi1's picture

Where is the cornering? The Silver cornering by the hunt brothers was something.. you could even count what WEB did with Silver, but this? Check the chart.

Apostate's picture

Incidentally, this is precisely the kind of action that would happen if and when someone had the urge to pull a Buffett and send the price of gold and silver through the roof (and destroy JPM and the LBMA in a matter of hours).

In that context, such a move should go down in history as the "Wonka Golden Ticket" maneuver. JPM would wind up like Augustus Gloop...

Serves 'em right; pigs get slaughtered.

strannick's picture

 

Yes.

 JPM would wind up like A.I.G. -Ignatius was Agustus Gloop's middle name-.

Testicular Cancer's picture

Now they have gone to GD far! Give me names & addresses. Tell me if you want it to look like an accident or to send them a message. How dare they touch chocolate! They will regret that.

Remington IV's picture

Coo-coo for cocoa puffs

JLee2027's picture

Made me laugh. Ok, that's post of the day material right there.

Miss Expectations's picture

"Come and live with me in peace and safety, away from all the Wangdoodles, and Hornswogglers, and Snozzwangers, and rotten, Vermicious Knids."

W. Wonka

Gimp's picture

I am going to get very cranky without my chocolate!

sgt_doom's picture

Hmmm.....Phibro, that's the Citigroup subsidiary involved in the oil and energy markets speculation.

Hmmm........

knukles's picture

Citigroup, Buffett & Salomon Bros. Connections

Yes, long ago far away, Phibro bought Salomon Brothers.  Later Salomon became ensnared in a Treasury bond auction scandal.  In which Warren Buffett was involved during the rescue.  Citicorp became Citigroup in part in order to absorb Salomon Brothers, Smith Barney and the Travellers Insurance Company Prior to the repeal of Glass-Stegal.  The formal, legal repeal was passed in 1999 as the Financial Services Modernization Act (Graham- Leach- Bliley) when Clinton was the president and Robert Rubin was Secretary of the Treasury.  Rubin having prior thereto been in charge of Goldman Sachs.  And this is but the tippie toe of the iceberg of the intermarriages. 

Smile, we're their daily pickin's!   

RobotTrader's picture

No doubt, the Plutocrats will find a way to deal with these "evil speculators" and crush them.

I expect a decent sized price spike, then a spectacular crash.

No different that what is happening in the Treasury market, which is 1,000,000 times bigger.  Curve steepener speculators are now being carried out on stretchers.

As well as those who flat out bet on higher interest rates due to surging deficits.

It will be the same old, same old.

The Plutocrats will engage the services of certain "Alpha Dog" commodity manipulators at Goldman Sachs, who will collude with the CFTC to find a way to crush these small-time speculators, and order will be restored.

Wash, Rinse, Repeat.

 

sethstorm's picture

Folks, that is not junk at all.  With all the bad news going around, lighten up a bit.

They're just giving a visual on how close they got to cornering the market.  A mighty appealing visual if not so much an accurate one though.

 

boricuadigm-shift's picture

Didn't Buffet owned Kraft?  Did he dumped Kraft after they bought Cadbury? Or does he still owns it?  Something smells very fishy...

Gwynplaine's picture
Gwynplaine (not verified) Jul 17, 2010 2:48 PM

CFTC position limits coming soon to a market near you.  Wave goodbye to GLD and SLV as they become essentially closed-end funds.

knukles's picture

Not if they don't own futures or other derivatives.  Intersting, eh?  Maybe they'll have to make sure its an all in the vault deal.  But then again, nobody has to fully comply before 2022 (?) is it?  And there are always offshore exchanges on which to transact.....

Bearster's picture

So we have yet another case of regulatory failure.  And what does everyone call for more of?  Regulation!

What kind of (and how large) regulatory failure would it take for people to call for elimination of regulation--a return to free markets?

You can't force a market to be free.

JLee2027's picture

You can't force a market to be free.

Markets are, by their intrinsic nature, free.  Just remove the regulators and manipulators.

Misean's picture

Cool man!  All those discount bullion coins I bought from this dude on the street corner have chocolate cores.  Woohoo!

brown_hornet's picture

I can see it now, the new James Bond flick...

 

"Chocolatefinger"

Gully Foyle's picture

brown_hornet

http://www.independent.co.uk/news/business/news/chocolate-finger-set-to-...

'Chocolate finger' set to make a fortune as price of cocoa soars

Monday, 9 September 2002

Anthony Ward, the trader dubbed "chocolate finger" who has cornered the cocoa market, looks set to make a fortune as the price of the commodity continues to soar.

Cocoa, traded on the Liffe futures exchange in London, has hit 15-year highs in recent days as the key news on the west African crop indicates that it will not be a bumper harvest.

Also, chocolate manufacturers, who stayed out of the market as they saw prices almost double over the last year, are now desperately short of the raw material and have been forced to buy the cocoa at these inflated prices.

Mr Ward, chief executive of Armajaro, which in July took delivery of around 5 per cent of world annual production, said the continued strength of cocoa prices proved that he was not simply a speculator. "We're happy. It's been demonstrated very well it was all market fundamentals. But I've been quite surprised myself at the strength of the market," he said.

There is already evidence that this is feeding through to the end product, with the price of chocolate bars rising in continental Europe.

 

Blah, blah, blah more at the link

ihedgemyhedges's picture

Muir, your avatar reminds me of my last night's activities.....And to stay on topic, chocolate was involved..........

Red Neck Repugnicant's picture

Chocolate?  You must really take your porn seriously. Barf!

Gully Foyle's picture

ihedgemyhedges

You learned to make moving .gif's last night.

Muir's picture

congrats!

I'm sure it had something to do with preparing your thesis paper, or research for your firm.

Then again, maybe not.

Xibalba's picture

http://www.youtube.com/watch?v=DgPje57RIxw&feature=related

I'm tired
I'm tired
I'm tired of struggalin dog.
I'm tired of struggalin dog.
The system ain't gonna change,
unless we make it change.
The white is the rock house,
Uncle Sam is the motha fuckin' pusher man.
What I gotta do to make sure ya understand?
Spinnin' on the beat-box Timbaland,
What I gotta do?
Kidnap a lil'
take a melody?
Make it relevant? Hold a harmony hostage
to these people, army verses,
that's the arms in the churches,
bombs in the purses,
just when you think it's calm on the surface,
we bomb on the first,
Uncle Tom get nervous and reverse.
Revolutionary curse words
First come, first served.
It ain't no loss, though,
Freedom cost blood
that's the word to the mouth bird, nigga.
We need a revolution,
We need a revolution,
The system ain't gonna change unless we make it change.
(x2)
(Black Power) We need a revolution, (Army G's)
We need a revolution, (Army G's)
The system ain't gonna change (Army G's) unless we make it change. (Nigga this that Army G's)
(x2)
Gotta a cure for AIDS and cancer,
wanna know come follow me now?
Diabetes and citracelli and mad cow wanna know how?
I can stop these cops from killin',
I can feed these hungry children,
I can stop racism, a product of cap-it-a-lism.
I can unpack the prisons,
and turn religion back to we livin'
I can stop the bloods from pillin'
caps
and the crypts from pillin'
back
and get yo' cousin off crack,
I can stop the war,
that's in the black hood,
Send the money right back to the po' fo' sho an'
if you with me nigga, let me know
let's go, if ya really wanna know
(I wanna know.)
(We need a revolution)
Mutha fuck they constitution
Army G's off in this think
they hip to the game,
gettin' off the chains
The system ain't gonna change,
unless we make it change.
You are now listening to WIBG,
the People's radio.

 

trav7777's picture

thank goodness for "traders" looking for "investments" to completely fuck everything up.

futures markets were supposed to be for producers and consumers, not fucking BNP Paribas and random fathead traders.

Some are calling for regulation as it's apparent we HAVE NONE NOW despite the existence of colluders ostensibly employed as regulators.

Those who say we need "free" markets are like those who watch the referees cheat and say bah to anyone who claims we need refereeing.

anony's picture

Make up your mind, trav.

Here you have BNP trying to take the 'free' out of the Ho-Ho market and you bitch.  Then you want the government to control the market and not make it free.

You contain multitudes. ; - )

trav7777's picture

did I say I wanted free markets?

Let's have a free football game and see what happens, no referees.  The big and the strong will push the small and weak around like when you have the big stack in texas hold'em.  They'll make the rules as they see fit.

I want regulated markets where the regulators actually DO their fucking jobs as the law outlines.

Orly's picture

And now an appropriate transcript courtesy of SNL no less- with the special added-bonus of spoof of a special guest star: none other than AlGore.  It has been modified to keep up with the times...

 

Pardo: We now return to "Willy Wonka and the Chocolate Factory", starring Gene Wilder and some midgets.

[dissolve to WWWonka walking an anatomically-correct Charlie Bustet through the chocolate factory ]

Charlie Bustet: You mean it, Mr. Wonka? You really mean it?

WWWonka: I certainly do, Charlie. I'm giving my entire factory to you!

Charlie Bustet: Woooww!!

WWWonka: We just have one more stop to make before everything's yours.
Charlie Bustet: Really? Where are we going?

WWWonka: Actually... the thing is... singing comically off-key ] "There's no earthly way of knowing... which direction we are going! There's no knowing where we are going! Or which way the wind is BLOW-OW-ING!!"

Actually, we're just going to the Accounting Department!

[laughs ] We have a lot of paperwork to get through.

[WWWonka blows flute, causing office door to open ]

[ WWWonka and Charlie enter the office, where accountant Glen is checking orders over the phone ]

Glen: We put in an order for what?! 75,000 pounds of... snozberries? What the hell is a snozberry?

WWWonka: Charlie? This is the factory accountant - my brother Glen. Glen Wonka!

Glen: [ on phone ] Listen, I'm gonna have to get back to you. [ hangs up ]

WWWonka: Glen? I have someone here I want you to meet. This.. is Charlie.

Glen: Warren, I told you not to bring tour groups through here.

Charlie Bustet: Say. Is anything here made out of candy?

Glen: No. Not really. But I think I have some Rolaids in my desk. Knock yourself out. Now... if that's all, I really have to get back to work. Warren. We have to take care of this Oompa-Loompa situation. They need green cards, Warren! We're not making tennis shoes here.

WWWonka: Glen, Charlie isn't here for the tour. I'm giving him sole ownership of the factory!

Glen: [ outraged ] You're doing what?!

WWWonka: I'm giving the whole factory here to Charlie!

Glen: You gave our business to an eight-year old child?! For God's sakes, why?!

WWWonka: Because a child's dream... is like a thousand candy rainbows.

Glen: Oh, yeah, that makes sense! I'll tell that to our stockholders when they storm down here and beat us bloody with our candy canes!

WWWonka: Glen! Please!

Glen: No, Warren! I've had it! I put up with a lot working here! Riding that insane, psychadelic boat to my office everyday! Having to step around piles and piles of Oompa-Loompa dung! But I am through with it!

WWWonka: What are you saying, Glen?

Glen: What I'm saying, Warren, is that, thanks to your wizwarbulous ideas, this factory is.. [ crumples reports ] ..hemorrhaging money!! You have a chocolate river running through here! And I'm pretty sure earlier today a fat kid drowned in it. You tell me how that's helping our bottom line!

WWWonka: Glen, please, take it easy!

Glen: Wait! I almost forgot! There's that billion dollars you spent on that machine that turns giant candy bars into tiny chocolate bars. Help me wrap my brain around that one.. 'cause I'm missing the big profit opportunity!

Charlie Bustet: Actually, that is a good point.

Glen: You want to know how bad things are?! You want to know?!

[ into intercom ] Get the report on Third Quarter Earnings!

[ Oompa-Loompas enter office with a song ]

Oompa-Loompas [ singing ]:

"Oompa-Loompa Oopity-Do!
I've got the Third Quarter Earnings for you!"

Glen: Save it! I don't have time. Just cut to the chase!

Oompa-Loompa: Uh.. [ reading ] You're Oompah Loompah doopity screwed.
Glen: That's right. We're Oompah Loompah doopity screwed! And I am tired of it. The kid gloves are off, Warren! I think it's really weird that every restroom in this factory has toilets made of graham crackers! I've never been comfortable with that!

[ WWWonka grins like a mischievious jackass ]

Is any of this getting through to you, you grinning goon?!

WWWonka: Glen, you're missing the point! This factory isn't about money. [ misty soundtrack sweeps over ] It's about making your dreams come true... no matter how strange or stupid that may seem. Isn't that right, Charlie?

Charlie Bustet: No way! I'm in it for the long green! For God's sake, all of my four grandparents sleep in one bed!

[ snaps fingers ] Oompa-Loompas!

[ obeying Charlie's command, the Oompa-Loompas drag a struggling WWWonka out of the office ]

WWWonka: But, Charlie! What about the magic?!

Charlie Bustet: Glen? There are gonna be some changes around here. First: we get a hold of a whole bunch of cheap Mexican chocolate!

Glen: I love it!

[ fade ]

 

http://snltranscripts.jt.org/02/02hwonka.phtml

:D

Mactheknife's picture

You really have way to much time on your hands. Just sayin :-)

JLee2027's picture

Articles like this is why this site is priceless.

CorrelationTrader's picture

Armajaro was the buyer.

Youri Carma's picture

Higher Food Prices driven by Speculation Not by Demand and Supply Vids

Global food bubble on the way? http://www.youtube.com/watch?v=344elODZbAY

Regulating derivatives could lower price of food http://www.youtube.com/watch?v=Q902BFhlx38

Speculation takes cocoa to near-33-year high 14 July 2010, by Jack Farchy and Jun Merrett (The Financial Times) http://forum.prisonplanet.com/index.php?topic=180031.msg1066126#msg1066126

Citizen of an IKEA World's picture

...with half of America beckoning diabetes with open arms, a rather sharp bout of inflation is about to be felt for all those whose daily calorie intake is over 2,000....

Tyler, some folks actually use chocolate for health benefits. 

70% Cacao squares are not exactly high-calorie junk food, nor are they particularly gorgeable.  Perhaps we should call those health-food types collateral damage.

lizzy36's picture

I am willingly to bet that those who use it for health benefits (those that eat a square or 2 of bittersweet dark chocolate) vs. those that gorge on bastardized american pseudo chocolate (the kind that one can get for $0.99, and the first 2 ingredients are sugar and corn syrup) runs about 1000:1.