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

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.