Hedge Fund Armajaro Moves to Corner the Global Cocoa Market Strange things are afoot in the world of cocoa, where a single hedge fund made a monster buy last week of roughly 7% of the global market for the brown beans that provide the flavor for the world's addictive sweet of choice, chocolate.

The fund, Armajaro Holdings, bought out virtually the entire stock of cocoa warehoused in Europe (primarily in London, where cocoa is traded). The buy encompassed cocoa stocks of 240,000 tons valued at close $1 billion at current spot prices. The unprecedented tonnage of the transactions has caused storage headaches at receiving broker-dealers. But Armajaro serves as a seller of bulk cocoa to many of the world's largest chocolatiers, so it's clearly not some ill-informed, cowboy investor.

Although the buy isn't large enough to truly corner the global cocoa market, should any signs of weakness or production problems emerge from key cocoa-producing regions, Armajaro will command huge pricing power and make a mint on its investment.

Further, one would think that, as a long-time player with great intelligence-gathering capabilities in the cocoa-growing world, Armajaro might know something the rest of the world doesn't. So brace yourself for rising chocolate prices: This buy likely presages a shortfall of cocoa supply that will precipitate even higher prices for the powder.

Bucking the Commodities Trend


Demand is already exceeding supply and has for the past four years, according to a blog post by NPR's Planet Money, which interviewed Laurent Peptone, an executive with the International Cocoa Association. The shortage has pushed cocoa prices to 33-year highs -- up 150% in the past two years -- causing many confectioners to cut bar sizes or raise prices into the teeth of a howling recession.

These trends have caused cocoa to buck the rest of the commodities sector, most of which collapsed two years ago with the global economic meltdown. Clearly, however, demand for chocolate is more elastic than, say, the demand for oil.

That's probably part of the reason why Armajaro made that enormous cocoa buy. Armajaro Holdings's chocolate trading is headed by Anthony Ward, a Briton and long-time market insider who formerly led the European Cocoa Association. Ward has long held that cocoa production in the Ivory Coast, the source of 40% of the world's supply, was going to decline. With prices so high, many chocolate makers have been holding off on buying additional stocks of cocoa in hopes that prices will decline. Armajaro's move, however, left just under 7,000 tons of cocoa available for purchase at present.

Significantly more cocoa will be delivered in the next six months, but for now, Armajaro appears to be effectively driving global cocoa prices, which have risen several percentage points since the current cocoa-stashing campaign began.

This isn't the first time Ward has made such a bold cocoa move. Over several months in 2002, when cocoa production was falling, Ward and Armajaro bought up large stocks in a huge bet that prices would increase. They did, and Armajaro raked in roughly 40 million pounds in profit on the maneuver: Talk about finding a golden ticket in a bar of chocolate.

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