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The Role of Speculators in the International Cocoa Market

In the periods of 2007 – 2009, the subject of the effect of the action of speculators on prices in the international cocoa market gained prominence in the deliberation of Council of the International Cocoa Organisation (ICCO). The passion and eloquence of Ambassdor St - Cyr Djikalou, spokesman for Producers, H. Sona Ebai, Sec-Gen of COPAL, Dr. Jose Martinez among others, led the crusade for investigation into the activities of speculators. The alleged squeeze of July 2009 position of the international cocoa market by a known cocoa trader, further fuelled the fear that, speculators can take hostage of the market to the detriment of other players.

Indeed the ICCO carried out the study by modeling the effect of non-commercial participation in the cocoa market and cocoa price movements over a period of time. The result was that, there was no significant statistical relationship. Did the finding reflect the reality in the market, especially noting the July 2009 squeeze? Surely the Producers camp of the ICCO, were not satisfied and called for further investigation. Clearly, the activities of speculators in the international cocoa market needs further clarification.

For most parts, cocoa producers have few qualms about speculators, when market prices are rising. This is because; farmers in cocoa producing countries benefit and receive better remuneration and profits from their cocoa farming. Falling cocoa prices produce the opposite effect for farmers. The reality is; the cocoa market is complex and can exhibit wild swings in prices. Price swings ordinarily referred to as volatility, make it difficult for farmers to receive stable income and to plan. In periods of excessive price swings and rapidly falling prices, governments and farmers start questioning the role of speculators.

Speculation is the practice of engaging in risky transaction in the cocoa market an attempt to profit from short or medium term fluctuations in prices. Many speculators in the cocoa market pay little attention to fundamental value or issues relating to demand and supply. Fundamental desire of speculators is nothing more than profits. They profit from rising markets, falling markets and volatile markets. The unpredictable motives of speculators are particularly undesirable for producers and consumers alike, who expect fair value for the physical cocoa that they produce or purchase for making chocolates.

It is in this respect that market regulators such as the Commodity Futures Trading Commission (CFTC) of the United States recently implemented a number of measures to regulate the influence of speculators in commodity markets. The rules set limits on the amount of volumes and market positions in order to make cocoa price gyration less volatile and more stable. The London market regulators are equally collating views of market participants with the view to make similar moves against market speculation. Does this vindicate the views of the Producers camp within the ICCO? Are speculators doing more harm than good to cocoa markets?

To begin with, speculators serve some useful roles in cocoa markets. There are many legitimate purposes for trading in cocoa futures markets. Buyers or sellers hedge the physical stocks against rapidly rising or falling futures market prices. This market participants need someone provide liquidity by taking offsetting positions to that of legitimate physical dealers. Speculators often come in to provide this invaluable service, without which the trade in physical cocoa would suffer. Speculators provide the market with such liquidity, which encourage the sustenance of the cocoa futures markets. In many respects, trade participants who buy cocoa from producers often hedge their position by selling the futures market, while speculators take the opposite action by buying the futures market, to support it from falling. Recent known examples of speculative activities in the cocoa market, which relates to the famous squeezing of July 2009 have resulted in rising prices in favour of cocoa producers and to the detriment of consumers. However, markets experience sharp and unanticipated fall, when speculators decide to come out their positions (liquidations) or even decide to take actions in the opposite manner.

My conclusion is that, intervening in markets solely to create volatility and to benefit of it could provide appetite for unethical and even illegal manipulations. Notwithstanding the role of speculators in providing the much-needed liquidity for legitimate trade hedging activities among others, speculators must be watched with eagle eyes. Their tactics at every movement of the market must be understood and neutralized in order to starve them of the anticipated profits. The emerging regulatory frameworks to limit the excessive effects of speculation deserve commendation and must be tightened even further in the general interest of the cocoa market.

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Cocoa Marketing Company (gh) Ltd
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Accra, Ghana.

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