Why Armajaro Holdings' Attempt at Cornering
the World Cocoa Market Is Destined to Fail
Justin Rohrlich July 19,
investors may want to take a look at Tootsie Roll or
Hershey, one money manager says.
hedge fund manager Anthony Ward, of Armajaro Holdings,
is attempting to corner the world cocoa market by buying
240,000 tonnes of cocoa beans -- the largest single
cocoa trade on London’s NYSE Liffe Exchange
(NYX) in 14 years and about 7% of annual global production.
Skinner, chairman of the Financial Services Club, told
the BBC that this represents "the whole of Europe's
beans themselves are expected to be warehoused in The
Netherlands, Hamburg, London, Liverpool, or Humberside.
Skinner told a television interviewer that he believes
Ward is 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.”
money manager Shawn Hackett, president and CEO of Hackett
Financial Advisors, a firm with a specific focus on
agricultural commodities, sees Ward’s attempt as a fool’s
once in a while someone attempts to do this. It’s always
a huge failure and never works,” Hackett tells Minyanville.
“I couldn’t be more bearish on cocoa, especially after
points to the attempt by the Hunt brothers of Texas
to corner the silver market in the 1970s.
described by SilverMonthly.com:
Bunker and Herbert [Hunt] had accumulated futures contracts
for approximately 55 million ounces of silver -- 8%
of the global supply at that time. But rather than selling
the contracts to turn a profit, as most commodity traders
do, the Hunt brothers had every intention of taking
delivery of their silver.
Paul Volcker had been installed as the Chairman of the
Federal Reserve, and Volcker was determined to get runaway
inflation under control. He abruptly raised interest
rates, thus soaking up the excess liquidity which had
helped fuel the silver boom. The price of an ounce quickly
dropped to $39 [from $50], and by March 14, it was down
to just $21.
As the price of silver fell to $21, the brothers had
futures contracts obligating them to buy at upwards
of $50 per ounce. On March 25, 1980, the Hunts couldn’t
make their $135 million margin call, and Bunker phoned
his brother Herbert with three ominous words: ‘Shut
it down.’ ”
The guy who tries to corner the market who thinks he’s
smarter than everyone else gets taken to the cleaners.
The concept is to try and take physical supply off the
market, then end users panic and you sell to them. Problem
is, the market never lets you get away with it. I don’t
know of a single example of someone who tried to corner
a market and it’s actually worked. Never seen anybody
pull it off. Why would this be any different? Cocoa’s
getting absolutely crushed today. It’s lost $212 in
the US market just while we’ve been on the phone. That’s
a shellacking. You don’t get a whole lot of 200 downs
in a day very often. Why? Because this news is a bearish
indicator. The real demand for cocoa isn’t what’s kept
it here, it’s artificial. Now that the intent has been
telegraphed, it’s not a surprise. Everyone knows what
the game is. And besides, there’s no shortage of cocoa
in the world; there are plenty of deliverable stocks
in the ICE (ICE) cocoa warehouses.
notes that, “the market will force [Ward] out of that
position and cocoa prices will likely fall substantially
going to buy now that they know this guy has all this
speculative cocoa?” he says. “I think we’re going straight
down in the cocoa market. There are other speculators
out there who can short the cocoa market and make a
fortune. The hedge fund community doesn’t care about
each other, they care about making money. They’re probably
thinking, ‘Okay, now this guy is on an island, we can
go short, hammer this thing down, and blow him out.’
Then that starts triggering stop losses, there’s a cascading
effect, his equity is then falling and falling and falling…I
can just see this guy getting totally ruined.”
a fairly good-sized nutshell, Hackett says:
It’s kind of like saying, ‘I’m gonna try to get away
with this even though everyone else who’s tried it has
been taken to the cleaners in the past. There’s always
some guy who thinks he’s smarter than everyone else,
and it’s no different this time. This is a signal to
get out, a classic topping kind of story. The fundamentals
of a market always win out in the end. Those forces
are more powerful than anything else in the world. You
simply can’t overcome forces of supply and demand. History
says this guy is in for one heck of a learning lesson.
If it was that easy to corner a market and make money,
everyone would be doing it. The reason no one does is
that it doesn’t work.
explains how someone could even attempt to corner a
market in the first place.
the US, you can only buy so much. Here, we appreciate,
we don’t want someone coming in and distorting the market.
In London, there are no position limits -- it’s the
wild, wild West. This type of trade wouldn’t be allowed
trader Sean Udall concurs.
far as cornering a market, shouldn't we have markets
in this day and age that should not be able to be cornered?”
Deborah Doane, director of the World Development Movement,
headquartered in the UK, says:
Investment banks like Goldman Sachs
(GS) are making huge profits by gambling on the price
of everyday foods. But this is leaving people in the
UK out of pocket and the poorest people in the world
are starving. The EU must follow the example of America
and crack down on banks' reckless gambling, and the
UK government should take the lead in tackling this
about all news reports would lead one to believe prices
for cocoa-based products are about to skyrocket. Many
say that if Amajaro sits on its cocoa stash and waits,
the chocolate makers will be forced to come to it for
their supplies, which would lead to a squeeze in September
when confectioners buy raw cocoa for the holidays.
on the other hand, thinks candy prices could actually
be entering a downward period.
one wanted to be a true contrarian here, they might
think about buying Tootsie Roll (TR)
or Hershey (HSY). They were squeezed
by sugar prices, which fell off a cliff. And now cocoa
is about to fall off a cliff, the way I’m seeing it.
They’ll have huge profit margins coming up. You want
to buy when input prices are very, very high, because
they rarely stay at those prices for long."
that cocoa prices have more than doubled since 2007,
Anthony Ward’s likely loss could very well be the prudent