Analysis -Cocoa players fear Armajaro grip on market may tighten

LONDON (Reuters) - London cocoa players could make an expensive mistake if they believe the media furore surrounding Armajaro’s grip on the market will deter another daring speculative play by the commodities house in the September contract.

Falling cocoa prices and initial talks with NYSE Liffe NYX.N to discuss increased regulation and transparency have lulled some physical cocoa players into a false sense of security, dealers and fund sources said.

September cocoa prices are vulnerable to being pushed above their 32-year high hit earlier this month on a shortage of graded cocoa supplies, combined with a lack of fresh cocoa in the lead up to the world’s number one producing region West Africa’s harvest -- due to begin in September/October.

Clive Furness, managing director of commodities consulting firm Contango Markets, said that in view of the tight physical market, he expects the premium on NYSE Liffe September cocoa futures could widen to about 500 pounds a tonne over December as shorts are forced to buy back or find cocoa to deliver.

“Some of the cocoa -- probably the good stuff -- received in July will be sold to manufacturers in offtake agreements. Anything else will be delivered back onto the market in December unless the market is at or near full carry,” said Furness.

Commodities firm Armajaro fuelled fears of a September supply crunch when it took delivery of almost all of the available Liffe graded cocoa stocks in July.

Armajaro was co-founded by coffee and cocoa trader Anthony Ward who has a reputation for shrewd and bold investment decisions.

Ward was not immediately available to comment.

The firm is one of Europe’s top three cocoa traders by volumes and was established in 1998, many years later than some of the century-old cocoa processing companies who are lobbying for increased regulation of the market.

Liffe’s July futures contract expired with a premium near 300 pounds a tonne over September cocoa as those short of the market and unable to deliver were caught out.

Many cocoa processors hedge cocoa products including butter and powder on the Liffe exchange but these products cannot be delivered onto the exchange, only beans can.

“The people who sold cocoa short when they didn’t have deliverable were speculating they were going to buy cocoa back cheaper,” a London-based trader said.

Some market participants complained about excessive speculation in the contract in a letter to the exchange earlier this month, which triggered a meeting between the exchange and concerned parties this week.

Cocoa prices have fallen since July’s expiry and the premium on nearby contracts has eased, diffusing tensions over what might happen with the September contract.

“It’s very logical for it (the premium) to come in at this time because of the public pressure. The shorts feel they’ve won a PR victory as it would be difficult for the long to take September in this climate. However, that is a brave assumption,” the London-based trader said.

Liffe’s benchmark September cocoa contract’s premium over December dipped below 100 pounds a tonne on Thursday after trading as high as 180 pounds early last week.

Commodity futures contracts usually become more expensive the further out they are dated to account for the cost of carrying the physical product.

“The spread is declining each day... it could be a bear trap with everyone thinking the market has come back,” said a trader at a European chocolate manufacturer, adding that nobody knows whether the stock-holder will take delivery of any remaining graded beans on the September contract.

If the September premium was to balloon, those short of the market are expected to cry foul.

“Ultimately this is likely to force NYSE Liffe to put position limits on all its soft commodity products,” said Contango Markets’ Furness.

“It isn’t going to stop speculation, speculation is just going to be in a different form and will probably centre on the opaque physical markets rather than the transparent futures markets,” he said.


NYSE Liffe is expected to consult with customers on the possible introduction of position limits on its soft commodity markets, despite an earlier consultation by the exchange which found many of its participants were against the idea.

Earlier this week Liffe met with a delegation representing the group of 16 European cocoa industry participants who sent a letter to Liffe on July 2 complaining of speculation in the London market and urging more transparency in London cocoa futures.

NYSE Liffe said on Tuesday it would consult with customers and its regulator on further potential changes to its cocoa market.

Liffe declined to comment on whether these discussions would include the introduction of position limits.

The New York-based IntercontinentalExchange's ICE.N rival cocoa contract has position limits and is more heavily regulated than the London market.

“The U.S. market’s a bit more transparent, it would be harder to do something like this in the U.S.,” said a fund source.

“If you’re going to carry a position beyond the exchange limits into the notice period you have to file first for position relief,” they added.

Reporting by Sarah McFarlane; Editing by Camila Reed