I worked at one of the world’s leading commodities trading company for almost twenty years. Philipp Brothers was a merchant trading company that bought physical commodities from producers around the world and sold them to consumers. Production is a local affair as commodities on exist in the crust of the earth or can grow in specific locations. However, consumption is ubiquitous as 7.4 billion people on our planet depend on these staples in their daily lives.
While I was at Philipp Brothers, the world of commodities trading underwent a dramatic change. In the 1970’s and before, producers and consumers did not have price screens on their desk and depended on merchants for price dissemination. However, in the 1980’s things changed and technological advances eventually put the most recent price for all assets in front of all market participants no matter how remote their location. The spreads for the merchant business shrunk and risk increased leading those in the business of commodities trading to take a lot more price risk than in the past. One trader at the firm for several years was Anthony Ward. He was an expert in the cocoa market with relationships in the world’s largest producing countries, the Ivory Coast and Ghana. Anthony also had a great rapport with the leading consumers, companies like M&M Mars, Cadbury-Schweppes, Hershey’s, and others. Anthony always had his fingers on the pulse of the cocoa market and because of his unique knowledge base and contact would often be one-step ahead of the rest of the market when it came to the path of least resistance for the price of cocoa futures.
After Philipp Brothers, Anthony went on to start a hedge fund in London called Amajaro. It was there that he got his nickname. In the Ian Fleming classic, the character Auric Goldfinger was loosely-based on Harry Oppenheimer, the South African mogul who made fortunes in the gold mining business. Anthony’s talent, contacts, and penchant for taking risk made him Chocofinger for the rest of the market, a well-deserved moniker for the man who controlled the ingredient in chocolate confectionery products for decades.
Choco-finger was a dominating figure in the global cocoa market
Anthony Ward is a larger than life character in the world of cocoa trading. He spent decades cultivating relationships with producers and consumers. As most commodities traders understand, the vast majority of volatility comes from the supply side of the fundamental equation, so Anthony became a fixture and trusted counterpart with government and industry officials in the two West African countries that supply over 60% of the world’s cocoa each year. After running cocoa businesses for merchant companies, he started a hedge fund, Amajaro, based in London. Ward’s relationships allowed him to look deep into the supply side of the cocoa market which provided insights that put him steps ahead of other traders in the market. Anthony developed a reputation as a huge risk taker, and he made massive bets in the market. As a result of his relationships, he started a private equity fund that invested in infrastructure in Africa as well as schools, farmland, and storage facilities.
Ward was a consistently profitable trader over his career, but the market changed, and he lost money for the first time in 2016. The loss was his first since he started Amajaro a decade before.
Amajaro throws in the towel
As the weekly chart shows, the price of cocoa fell like a knife starting in June 2016 when the commodity was trading at the $3237 per ton and reached a low of $1769 one year later. The action in the cocoa market claimed a high-profile victim this month, the world’s most closely-watched merchant trader. Amajaro is closing its door because of the rising influence of algorithmic and systems-based trading in the commodities market. These quantitative trading systems have made taking long and short positions based fundamental supply and demand information not only challenging but often impossible. The traders with their fingers on the pulse of producers and consumers of the world are slowly disappearing and being replaced by machine-based logic. Anthony Ward is not the first to go, and he will likely not be the last.
The second high-profile commodities trader to walk away from the business in 2017
Earlier this year, a trader many in the market considered “the God” of the oil market threw in the towel as Andy Hall closed his hedge fund Astenbeck Capital Management. In early August, Hall told investors in a letter that the global crude market had “materially worsened.” About one month before Andy Hall decided enough was enough, the price of crude oil dropped to its lowest level since August 2016 when the price declined to $42.05 per barrel. Like Ward, Hall said that “Algorithmic trading systems have increasingly come to dominate. Investing in oil under current market conditions using an approach based primarily on fundamentals has, therefore, become increasingly challenging. It seems quite likely this will continue to be the case for some time to come.”
I worked with both Hall and Ward at Philipp Brothers in the 1980s and 1990s. The only hedge fund managers from the company that was one of the world’s most influential merchants left in the business after Ward’s departure are Michael Farmer and David Lilly whose $2 billion nonferrous metals trading fund, Red Kite, continues to operate. However, they have not had an easy time of it, and in October the fund sued Barclays for $850 million for alleged market abuse and manipulation that caused red kite losses. The suit contends that Barclays allowed staff to share confidential information about its positions with traders at the London Metal Exchange allowing the bank to profit by placing opposing bets. So far, Red Kite remains in business, and it is likely that the latest rally in the copper market has been profitable for the fund. However, Michael Farmer is a fundamental trader, and I am sure that the current market environment has frustrated him more often than not over recent years. And, it is possible that he too may decide to pack it in one of these days soon.
Outside of the Philipp Brothers alumni, Blackstone Group closed its resources fund, returning money to investors because of challenging trading conditions. The landscape changed in the 1980s when merchants had to move from buying from producers and selling to consumers in a nontransparent environment to taking more price risks. Hall, Ward, Farmer, and others became experts at the craft. However, now the market has changed once again, and systems based trading has sent two of the three packing. Andy Hall and Anthony Ward became very wealthy men as they honed their craft and profited for decades, so they go off into the sunset with fond memories and plenty of money. Recently, OPEC called on Hall for his opinions on shale oil before the cartel met on November 30. I am quite sure that the Ivory Coast and Ghana, as well as many consumers, will continue to solicit the opinions of Mr. Ward as Choc-finger knows more about cocoa market fundamentals than just about anyone on the planet.
Oil rallied after Hall closed Astenbeck- Is that a bullish omen for cocoa?
As someone who worked intimately with Mr. Hall for the better part of a decade, I can attest to the fact that he made the lion’s share of his money on the long side of the oil market. Therefore, there is an irony that he departed the business just after oil fell to its lowest level at $42.05 per barrel on the nearby NYMEX futures contract and five months later, it was trading at the highest level of the year at $59.05.
On December 11, the price of March cocoa futures was trading at lows of $1800, which was just above the June low at $1769 per ton. If would be equally ironic if five months from now, or sooner, cocoa decided to rebound and trades above $2300 per ton. Source: CQG
March cocoa futures declined from $2226 on November 10 to lows of $1852 on December 13. On December, the price of March cocoa futures settled at the $1912 per ton level.
Murphy’s Law dictates that the odds of a significant move higher is in the cards for the cocoa market and the most recent selloff could have been the result of a liquidation of Amajaro’s positions in the market for the soft commodity. The firm also had a presence in the coffee market, and that had dropped over recent weeks. Source: CQG
As the daily chart illustrates, the price of March coffee futures declined from $1.33 per pound on November 30 to a low of $1.1830 on December 12. On December 19 March coffee futures on ICE settled at the $1.2175 per pound level. It is possible that Amajaro liquated a position in the Java market leading to the most recent low.
Global demand continues to support the price of the soft commodity
Two great fundamental traders have closed their funds in 2017 as Andy Hall and Anthony Ward decided they could not compete with the systems-based traders who have made their lives miserable over recent years. Hall departed, and the oil market rallied by $17 over the following months, a move that likely would have resulted in profits for him and Astenbeck investors. However, after massive losses, he could no longer hold on to positions or the money that investors had entrusted to him. Now that Ward is gone, the selling in the cocoa and coffee markets could be over, and they are likely to insult the fundamental trader just like crude oil insulted Andy Hall.
Global demand continues to support the prices of all agricultural commodities. More people with more money around the world means that there is more demand for agricultural commodities. With cocoa and coffee trading at prices that are a lot closer to lows than highs over recent years, the risk-reward of a long position is favorable. Perhaps Ward’s departure has increased the odds of success on the long side of the market sooner rather than later.
Each week in The Hecht Commodities Report, I provide subscribers with up, down, or neutral price bias based on a combination of fundamental and technical analysis. The report is a useful ready reference for investors who trade or invest in futures and options markets, in ETF and ETN products, as well as all asset markets.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.