The Cocoa Corner: Is Choc Finger Down $150 Million?

In a front page story on Sunday, the New York Times suggests that commodity investor Anthony Ward may be trying to corner the cocoa market.  Ward–known as Choc Finger–reportedly purchased 241,000 tons of cocoa, about 7% of the world’s annual crop. The price tag? A cool $1 billion.

The NYT suggests that Ward is doing this to profit from future price increases, either natural or created by his new market power:

His play has some people up in arms. While some see it as a simple bet that cocoa prices will rise on falling supply, others say Mr. Ward has created a shortage of cocoa simply to drive up the price himself. … The fear is that Mr. Ward will become the go-to source until the annual cocoa harvest, which starts in October. With candy makers starting to stock up for the holiday season, they may be forced to pay him ever-higher prices — and cocoa has already jumped 150 percent since 2008.

“The squeeze was really timed perfectly,” said Eugen Weinberg, an analyst at Commerzbank in Frankfurt.

The corner theory is plausible, but I think the NYT committed journalistic malpractice by not reporting another salient fact: cocoa prices are now about 15% lower than when Choc Finger made his play. Ward allegedly bought at a price around 2,700 British pounds per ton of cocoa, but according to the FT the futures contract for September closed on Friday at only 2,300 pounds:

If Choc Finger’s game is to profit from future price increases, he’s sitting on $150 million in unrealized losses. Not a sweet outcome.

Of course, that arithmetic applies only if Choc Finger is playing buy-and-hold with his cocoa stash. There are many other ways he might be trying to profit from his purchase. Perhaps he owned July futures that paid off handsomely from the run-up in price (as you can see in the FT chart, July was the front-month contract until July 15th, after which the September contract, at a much lower price, took over). Or maybe he locked in higher prices from pre-arranged sales? As Craig Pirrong notes, pre-negotiated sales make good sense if you are trying to execute a corner (Paul Krugman offers another simple model). Those details matter, but you wouldn’t know it from the NYT story. (My guess, by the way, is that he’s not down $150 million, although the logic of the NYT story would suggest that. But only time will tell.)

Whatever Ward’s motivation, keep in mind that big purchases don’t always pay off. Sometimes you win, sometimes you lose. As Choc Finger knows first hand, according to Amsterdam Trader:

Press is reporting the “biggest cocoa trade in fourteen years”, but it’s not that special. Back 2002 the same cacao king Anthony Ward bought 202.000 tons, just a little less compared to the current 241.000. At the time his purchase represented 5% of the world market. He made 40 million in 2002 on the trade. Three years ago Ward was quoted as the chocolate guru : “The world’s not going to run out of cocoa, but they’ll have to pay more to get the right beans”. Most press reports refer to the biggest cocoa trade in fourteen years, but haven’t done any more research. The large cocoa trade in 1996 was done by the firm Phibro, amounting 300.000 tons. In charge of the cocoa desk at the time at Phibro, was nobody else than the same Anthony Ward. Phibro lost money on this cocoa trade by the way, and was forced to unwind their positions.