Derivatives under scrutiny after a run on cocoa

22nd July 2010

You don't often come across a sentence that includes the words ‘cocoa' and ‘abuse' so The Independent deserves some credit for this morning's headline: Cocoa price hike not 'abusive behaviour'.

The story refers to Armajaro, a commodities hedge fund, that earlier this month took delivery of 240,000 tonnes of cocoa beans.

This is equivalent to about 7% of the annual crop and is enough to make more than five billion chocolate bars.

The purchase represents a huge bet that the price of cocoa will continue to rise, despite the fact that last week it hit a 33 year high of £2,732 a tonne.

This is not the first time that Armajaro has done this. Back in 2002 The Independent reported that they had bought up 5% of the world's cocoa output, taking physical delivery of 148,000 tonnes. At the time the price was a lowly £1,300 a tonne. 

There is a lot of concern about the effects of this sort of speculation on the prices of goods and there is a fair chance that this will lead to a reform of the $615 trillion derivatives market.

Speaking to Institutional Investor, Professor Michael Greenberger said: "The futures markets, including derivatives, were designed to be hedging vehicles in order to boost liquidity.

"They are not capital-building vehicles designed to hit home runs."

This sort of clampdown is unlikely to rid us of the curse of the fat fingered trader, where someone inadvertently taps in the wrong trade on their keyboard and sends the markets into a tailspin like this recent example covered by The Daily Mail.



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