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 yesterday'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.