Cocoa speculators damaging industry, German producers

By Jane Byrne

- Last updated on GMT

Related tags: International trade, Currency, Commodity market

The German confectionery industry has expressed concern over the fluctuation in the price of its key raw ingredient, cocoa, as a result of speculation.

In a statement on its website late last week, the Association of the German Confectionery Industry (BDSI) said it condemns the speculative investment by banks and funds in agricultural commodities that the food industry needs for its production.

London cocoa futures hit 32-year-highs at the start of the year but have since dropped by approximately 20 per cent.

"This vice-like movement is putting many confectionery makers under pressure"​ the BDSI said. "The reason for the cocoa price rise is largely speculation by institutional investors, which have discovered food commodities as a lucrative investment object in the period of financial crisis."

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, investors from outside of the food industry have recently brought "vast amounts of money" to agricommodity markets, says 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.

Risk diversification

In a far-reaching report on global commodity staples last year, 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.

An article in the US newspaper the Wall Street Journal estimated that since 2001, investors may have poured up to $200bn into commodity-linked index funds.

Bubble set to burst

The BDSI said it believed cocoa prices were likely to continue their fall as the global cocoa crop remains constant while chocolate consumption is falling: “All fundamental data indicate that the cocoa commodity bubble will soon burst,"​ it said.

The association views 2010 as a year ‘full of uncertainty for the German confectionery industry’ with possible rising unemployment impacting negatively the German mood for confectionery indulgency.

The sector hopes to see sales momentum generated by the World Cup.

Currency and credit insurance

More than 40 per cent of the German confectionery product output is exported. BDSI estimates show that in 2009 export volume was down slightly for the first time in years. In terms of value, however, exports rose by 0.5 per cent to €4.7bn, it said.

However the BDSI claims that given the strength of the euro and currency exchange rate fluctuations, German confectionery and snack items found it difficult to compete in key export markets such Russia and Hungary.

The group also argues that credit insurance, which is indispensable for exports, has no longer been approved for many countries since mid-2009: "Without credit insurance for exports, exporting is an incalculable risk for us,"​ says Tobias Bachmüller, Vice Chairman of the BDSI "This is where political decisions are needed."

Related topics: Market Trends

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