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Hedge fund Armajaro buys $1bn worth of cocoa, enough to make chocolate bars to fill ‘five Titanics’

Tuesday, July 20, 2010
Opalesque Industry Update – Hedge fund manager Anthony Ward, co-founder of London-based commodities-focused hedge fund firm Armajaro Holdings Ltd, has bought 240,100 tonnes of cocoa worth $1bn, making it the biggest single delivery from London’s Liffe exchange since 1996 and equal to about 7% of annual global production, various media reports said.

Armajaro’s bold move drove cocoa prices by 150% over the past months, its highest level in 33 years. Cocoa prices rose by 0.7% last week to peak at $4,180 per metric tonne – the highest price for cocoa in Europe since 1977. The rise follows a series of weak harvests in Ghana and the Ivory Coast, two of the largest suppliers, said The Telegraph.

Chris Skinner, chairman of the Financial Services Club told the BBC yesterday that Armajaro’s cocoa purchase represented "the whole of Europe's cocoa" - enough to fill "five Titanics".

Betting on food will give good returns
Commenting on Armajaro’s position, Ward was quoted by The Telegraph yesterday as saying: "Food will go to a price where it encourages these developments. If you're long food, it will give you good returns."

Armajaro, one of Europe's top three cocoa traders by volume, has made no secret of its desire to increase physical delivery of cocoa. Prior to the cocoa purchase, the hedge fund revealed that it planned "to develop its physical commodities business by further expanding its sourcing operations to enable it to supply its customers with increasing quantities of traceable commodities.”

Company Chairman Martin Lampert said the group's commodities trading subsidiary was benefiting from "a significant shift in the cocoa industry towards the sourcing of traceable and sustainable products, with several major chocolate manufacturers announcing their intention to source accordingly.”

In January this year, Ward advised investors to have “something that grows” if they are looking for a weighted portfolio. He said that as the world’s population grows and the weather changes due to global warming, food and water will be a major problem because of shortages. “So commodities – which will reflect these issues - should be included, alongside stocks and bonds. They are a good inflation hedge and tell you about what’s going on in the world (See Opalesque Exclusive: here).

World Development Movement finds Armajaro’s move bitter
Not everyone likes Armajaro’s move. The World Development Movement (WDM) has accused hedge funds and banks of driving the prices of commodities, including cocoa, energy and coffee up, The Guardian reported yesterday. WDM’s Director Deborah Doane has called on the British government to follow the U.S. lead in launching a crackdown against commodities markets speculations amidst the latest move by Armajaro to horde cocoa supplies.

The group said that the “risky and secretive” financial bets on food prices are to be blamed for the decline in food harvests because it makes it harder for producers to plan what to grow and at the same time push prices up for consumers and increase the risk of civil unrest in poorer countries. WDM cited the food riots in Mexico and Haiti in 2008 as examples.

"Nobody benefits from this kind of reckless gambling except a few City wheeler dealers", Doane said.

However, Goldman Sachs dismissed the WDM report and described it as “horribly misinformed,” Politics.co.uk reported yesterday.

Michael DuVally, spokesman for Goldman Sachs said that the "research by respected international bodies like the OECD demonstrates clearly that long-term trends, including increased meat consumption by the growing middle class in the emerging markets and the increased use of biofuels in the developed markets, have created a backdrop for global food shortages."

Goldman Sachs added: "We have repeatedly said that we support effective reform. Our lobbying effort is designed to achieve reform that will continue to allow producers to hedge their risks so that consumers get the benefit of greater price stability. To suggest otherwise is disingenuous and downright misleading."

Ward can manipulate chocolate bar prices
One of the major impacts of Ward’s large cocoa purchase is the concern that he can manipulate the prices of chocolate bars and candies.

Skinner said during BBC’s Today programme: "I guess Mr Ward's thinking, 'Well, I'd bet on the fact that, in the future, if I get control of the whole supply of cocoa, then I can corner the market and make a bit more money out of this.' He's done it before, in 2002, so he's trying to do it again.

"It's a bit like the film, Trading Places, with Eddie Murphy, with the pork bellies. If you control that supply and hold on to it and you squeeze the market, you see the price going up and at some point you release those supplies and then you make a mint."
-Precy Dumlao

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