Why Armajaro Holdings' Massive Cocoa
Bet Went Bust -- And How to Play It
Justin Rohrlich August
30, 2010 12:20 PM|
the world thought the sky was about to fall, it didn't.
But cocoa prices did.
On July 16,
Anthony Ward’s Armajaro Holdings attempted to corner
the world cocoa market by taking delivery of 7% of the
world’s physical supply when prices were at a 32-year
high of $3,200/tonne.
tonne purchase was the largest in 14 years and spooked
end users who were convinced Armajaro’s move would cause
a supply squeeze just as confectioners were gearing
up for increased holiday season production.
news broke, Tim Spencer, a former Armajaro executive,
told the New York Times that, “Globally, [Ward] is unmatched
in his knowledge of cocoa.”
an analyst at Commerzbank in Frankfurt, told the paper
that “The squeeze was really timed perfectly.”
Steinemann CEO of Barry Callebaut, the world's biggest
chocolate maker told the Financial Times, "If you
consider the fundamentals, I'd tend to say prices won't
fall. There's no fundamental reason why cocoa should
But, at the
time, Shawn Hackett, president of Hackett Financial
Advisors, a money management firm with a focus on agricultural
commodities, told Minyanville that he had quite a different
in a while someone attempts to do this. It’s always
a huge failure and never works,” Hackett said. “I couldn’t
be more bearish on cocoa, especially after this news.”
that, “the market will force [Ward] out of that position
and cocoa prices will likely fall substantially from
“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.”
Hackett was right.
mammoth play didn’t cause the sky to fall, nor did cocoa
prices go through the roof. In fact, quite the opposite
occurred, as prices have dropped 26% since.
Street Journal now reports that “Two hedge funds run
by Armajaro, including its CC+ Fund, which focuses on
cocoa and coffee, lost about 6% of their value during
the first two weeks of August, according to investors
who have viewed the returns. And since then, prices
have continued to decline, suggesting Mr. Ward could
be coming under more pressure.”
explains what investors can learn from the “Great Cocoa
Scare of 2010”:
When you see a dramatic purchase like this, it almost
always signifies a near-term panic buy that is associated
with a major high point in a market. You see it periodically,
like with cotton in early ’08. There was a rush of panicked
buying right before the market changed direction, and
several end users that had been around for years and
years went bankrupt. Ford (F) panicked
about palladium 10 years ago when it went from $200/oz
to $1200/oz and bought up massive quantities for catalytic
converters. "Let’s not take any chances -- we need
this stuff." Well, it just went straight down to
$400 after that.
According to Hackett, the pattern is always the same.
You hear it over and over again -- "This time it’s
different, this time it’s bullish," but it never
is. It inevitably ends in disaster. It’s always been
a clear topping signal, a quintessential contrarian
indicator, and when you see this happen, either get
out of a long position or go short. Cocoa was at $3200/tonne
when the announcement came out, Monday morning it was
down to $2950/tonne. There was a brief rebound rally,
and now it’s down to $2700/tonne. And it’s all happened
literally since that supposedly bullish indicator.
A near-term bottom will likely be established “the minute
you hear Armajaro’s out completely,” says Hackett. “When
somebody blows a position out like that, the overhang
of the market is gone -- it takes all the psychological
pressure off, there’s no one there to pick up the slack,
and the buyers come rushing in.”
that “during much of the rally that many thought was
fundamentally-based, it was obviously artificial demand.
It just wasn’t moving up for the right reasons.”
like Hershey (HSY), Tootsie
Roll (TR), Kraft (KFT), and
even Archer Daniels Midland (ADM),
which processes cocoa for manufacturers globally, could
benefit from the move down in cocoa.
20, 30% lower prices should help improve margins going
into 2011, at least on the input cost for cocoa,” Hackett
“In the Armajaro
case, as typically happens, the true investment opportunity
was to do exactly the opposite of what seemed logical.
It’s very hard to do, it never feels comfortable to
do what everyone else isn’t, but if you want to realize
a return that’s better than most, you have to do something
that’s different than most."