Black Swan Insights

Showing posts with label cocoa. Show all posts

Anthony Ward's Sweet Tooth Has Cost Him $230 Million

Anthony Ward is probably ruing his $1 billion cocoa purchase back in July. Since news leaked of Ward's activity, the price of cocoa has fallen by 23% as the market digests a stronger crop out of the Ivory Coast. This decline in cocoa prices means Ward has lost about $230 million. Ward's investment thesis was that weather conditions would negatively impact supply from the Ivory Coast, which produces approximately 50% of world cocoa production. So far this has not occurred. The only major news in the cocoa market today was the announcement by the International Cocoa Organization, which upped expected cocoa demand by 3,000 tons. Overall the ICCO estimates the cocoa market will be in deficit of 72,000 tons during 2010-2011. As we speculated earlier, these kinds of market corners rarely work as the market starts to trade against your position leading to large losses. The real question is how much pain can Ward take before he liquidates his cocoa position?

From Dow Jones:

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Anthony Ward's Cocoa Speculation May Be In Trouble

As we speculated earlier, trying to publicly corner a market is a sure way to financial ruin (just ask the Hunt brothers). So far Anthony Ward's seems to be learning this the hard way. Since news of Ward's large purchase leaked out, the price of cocoa has plummeted by approx 10.5%, as an improved crop outlook from the Ivory coast has eased supply concerns. This is contrary to Ward's bet that a poor crop from the Ivory Coast would lead to a supply shortage and higher cocoa prices. It is surprising that Ward could be so wrong when it comes to the supply/demand situation. He has an extensive information gathering operation ,which gives him an inside track to the worldwide cocoa market. In particular, he has people on the ground in the Ivory Coast monitoring the weather, cocoa volume at major ports, and general crop conditions. His firm also acts as a distributor of cocoa and coffee in the region, which gives him an information advantage when it comes to where cocoa is being shipped. But so far, all of this has not helped him with his cocoa operations.

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Update On Anthony Ward's Cocoa Corner

Well it has been four trading days since news leaked about Anthony Ward's attempt to corner the cocoa market and so far things have not worked out well for the hedge fund manager. The price of cocoa has fallen for 4 consecutive days for a total decline of around 7%. This adds up to a loss of over 40 million pounds for Mr. Ward and company. The reason given for the sharp decline is hedge funds liquidating their long positions and I imagine initiating short positions. As we have speculated earlier, Ward made a mistake letting the news of his large purchase leak out because it would encourage other hedge funds to target his position. This seems to be occurring right now and would account for the large decline in cocoa prices. Is Mr. Ward in trouble yet? It is difficult to say and depends on the leverage he is using for his speculation. Usually commodity speculators use quite a bit of leverage which often leads to their demise, but Mr. Ward is a real professional--he used to trade for the commodity trading firm Phibro and is an expert in the cocoa market. It will be interesting to see how this saga plays out.

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Cocoa Market Cornered by Anthony Ward

Boy, it sures takes you back to the old days of Wall Street when audacious speculators would attempt to corner a commodity. In those good old days, they lost and were ruined as a result of their temerity. Well, news leaked out over the weekend that British hedge fund manager Anthony Ward has tried to corner the cocoa market by taking delivery of 240,000 metric tons, which is the equivalent to 7% of world cocoa production. The obvious goal is to create an artificial supply shortage of cocoa in Europe and force prices higher. It should be remembered that Mr. Ward is not some dilettante rogue speculator; he has a very successful history of trading cocoa and other soft commodities. He also has fundamentals on his side due to poor cocoa crops in the Ivory Coast. Furthermore, warehouses stocks are very low. I would also argue that he is acting in collusion with other entities--be it hedge funds or otherwise. Cornering a commodity takes a lot of money and more importantly strong financial backers who are willing to see the operation through to its resolution.

However, Mr. Ward and company made a serious mistake by allowing word to leak about the operation. Rule #1 when it comes to market manipulation is secrecy. If rumors of your operations become known, the market will start to turn against you. Hedge funds in particular will start shorting cocoa because they know that if they can force heavy losses for Anthony Ward, at a certain point, he will be forced to sell his entire position for a steep loss. This will in turn cause cocoa prices to plummet as everyone tries to get out ahead of Ward and company. We might already be seeing this happen considering today's action in the cocoa market. Cocoa prices are down 5% as the market digests this recent news. It seems the market is going against Mr. Ward. Will this end well for Mr. Ward? We don't know yet, but if history is any guide, it probably won't.

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