The Last Shovelful of Dirt

No doubt when you were quaffing down a warm cup of hot chocolate on Christmas, you were thinking to yourself: “I wonder how that cocoa corner played out.”  Well, maybe not.

But anyways, wonder no more.  In mid-December, Armajaro, the British hedge fund run by Tony Ward, delivered the bulk of the 110,000 tons of cocoa tendered against the expiring contract.

The deliveries occurred at a price of about 2000 BP/tonne; Armajaro took deliveries at prices of around 2700 BP/tonne. On deliveries of about 240,000 tons, that corresponds to a loss of 168 million BP, or about $260 million.

That, boys and girls, is what they call “burying the corpse.”*

Armajaro’s losses on the deliveries it took might actually exceed this outsized sum if they made any deliveries or cash sales at spot prices prior to December.  Prices were below 1800 BP/tonne in November; only tragic political turmoil in the Ivory Coast has buoyed prices of late.  But even chaos in the most important cocoa producer (something not anticipated in July) has not been enough to drive prices back to the inflated levels seen in July.

In his recent article on the cocoa market, FT commodities editor Javiar Blas duly notes that Armajaro delivered a huge quantity of cocoa.  But he lets pass in deafening silence the fact that this large delivery completely undercuts his previous “reporting” on Armajaro’s actions.  In this case, “reporting” meaning “credulously repeating Tony Ward’s fantastical cover story.”  A cover story, I might add, which was transparently fantastical when it was first spun in July–as I pointed out then.  You might remember the bologna about expectations of a bad crop (which would in no way make it rational to take huge deliveries in the face of a steep backwardation) and pre-sales of the deliveries (which would have, in fact, enhanced the profitability of a manipulative strategy, and the existence of which, in any event, is belied by December’s deliveries). Self-evident and self-serving tripe then, and now.

Blas writes:

In any case, investors will do well not to focus on Armajaro’s selling, but on the buying side. If big physical players turn to the exchange for supplies over the short term, it could be a signal that the cocoa market is heating up again.

Yeah, if I were him I wouldn’t want anybody focusing on Armajaro’s selling either.  Sorry, but “move on, nothing to see here” doesn’t quite cut it.

Armajaro’s escapade sparked considerable popular pique .  I had quite a few people contact me to register their outrage at Ward’s machinations.  Someone started an anti-Armajaro Facebook group, and a couple of British artists also tried to publicize the shenanigans.

The exchange and the British regulators–not so much.  And the FT–definitely not so much at all.  Quite the contrary.  It’s sad commentary when some ordinary folks on Facebook have better BS detectors than those operating the market, those supposedly overseeing it, and those who get paid to report on it.

* And no, Mr. Nissen, I didn’t coin that phrase.  But I wish I had.

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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