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Sharp fall in price for cocoa as investors sell

By Lindsey Partos , 08-Apr-2009

Prices for chocolate makers' key ingredient cocoa fell this week after speculators on the futures exchange exit cocoa positions.

At London's LIFFE exchange, cocoa futures closed on Monday at £1,788 (€1,970) a metric ton for July delivery, dropping from £1,942 (€2,140) registered on Friday.

 

And in the US, the New York mercantile exchange saw cocoa futures for July delivery falling over $200 to $2,558 (€1,952) a metric ton from the previous Friday.

 

These figures compare to the margin-squeezing highs of £2,000 (€2,133) a ton clocked up in January this year, and when prices crashed through the $3,000 (€2,263) a metric ton in June 2008.

 

Industry observers suggest this latest fall in price is largely linked to investment funds and investors selling their positions on a stronger dollar that removes some of the interest such funds may have in trading in soft commodities such as cocoa.

 

Speculators' influence in cocoa price equation

 

This latest fall in price for cocoa illustrates the influence investment funds have on global cocoa prices today.

 

Independent of the financial crisis that has hit the world markets, and the subsequent increase in attention by governments on hedge funds, stakeholders, and observers, to the cocoa industry continue to speculate on the role investment funds play in price movements for this key chocolate ingredient.

 

Recent history has revealed a sharp increase in cocoa price without evidence of a shortage of beans, and a subsequent fall without any absolute news of considerable oversupply. Yesterday's fall in cocoa price, for example, came as speculators liquidated their positions.

 

In recent years, high prices for commodities, like cocoa and wheat, have attracted considerable interest from speculators. Tempted by potential gains to be had through the price volatility of the commodity market, institutional investors from outside of the food industry have recently brought "vast amounts of money" to agricommodity markets, say the UN.

 

And not only cash, but also upward price pressure for commodities used by actual food business players reliant on the physical stocks for their manufacturing needs.

 

"Whatever one's views of the merits of this {investment interest in agricommodity markets}, accommodating the large inflow of investment has proved tough for traditional users of the cocoa market," states Fortis in a recent report.

 

Up to $200billion poured into commodity-linked index funds

 

In a far-reaching report on global commodity staples, the UN's Food and Agricultural Organisation (FAO) drew particular, critical, attention to the role speculators may have played in the recent rise in global food prices.

 

"A key concern now is the participation of new agents that are perceived to be motivated by risk-diversification to the exclusion of serious assessment of price levels," states the FAO's annual Outlook report.

 

One analyst interviewed by the US newspaper Wall Street Journal last year estimated that since 2001, investors may have poured up to $200billion into commodity-linked index funds.

 

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