Hot Chocolate

Nelson Bunker Hunt and his brother Herbert Hunt were rich – oil billionaires (their daddy left it to them) with cash to burn. But they wanted more, a lot more. So they figured that if they could “corner the market” in a precious metal – like silver – they could create a legal monopoly and drive the price of that metal through the roof… and get wildly richer. So in the late 1970s, they started buying up silver, silver futures and whatever they could; at one point, they actually owned or controlled somewhere between one third and half the earth’s commercially available silver.

Needless to say, their buying that much silver in the market drove the price up, even for them – from $11 an ounce in September of 1979 to almost $50 in January of 1980. “The situation for other prospective purchasers of silver was so dire that the jeweler Tiffanys took out a full page ad in the New York Times, condemning the Hunt Brothers and stating We think it is unconscionable for anyone to hoard several billion, yes billion, dollars worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver.” Wikipedia.

The total cost of all that precious metal – most of it on paper – created too big of a cash need even for the Hunts, so they bought a lot of stuff “on margin” (read: borrowed money). There was a lot of pressure on the commodities exchange (Comex) to “do something” about these nasty Hunt brothers, so on January 7, 1980, the passed a new rule (“Silver Rule 7”) limiting how much a buyer could stake a market “on margin.” And price of silver began to tumble, 50% in just four days. On March 27, 1980 (“Silver Thursday”), after the price of silver had fallen below the minimum price required on margin buys and the brokerage firms called the Hunts’ margin loans, the Hunt brothers stared a massive 1.7 billion dollar call in the eyes, which they had no way of paying, threatening to bring down more than one brokerage house with them.

With some pressure from the government and some help from a consortium of banks, loans were hastily arranged, but by 1988, the Hunt brothers lost 80% of their once glorious $5 billion fortune (in 1980, that was the equivalent of a multiple in billions today). In 1988 the SEC investigated and found the brothers guilty of federal conspiracy changes in connection with their efforts to monopolize silver, an event which triggered one of the biggest bankruptcies on record.

Cornering the market has always been the stuff of legends and vain aspirations. The Hunt debacle even inspired a 1983 comedy motion picture, Trading Places (it spoke of orange juice futures), starring Dan Aykroyd and Eddie Murphy. Why the history lesson? Because another dude, British hedge fund (Armajaro) manager Anthony Ward, has just managed to buy 7% of the world’s cocoa bean output, enough to have a very significant impact on prices.

Dubbed “Choc (or “Chocolate”) Finger” (an allusion to the villain in the 1964 James Bond film, Goldfinger), it appears Ward actually purchased 241 metric tons of cocoa (and had the stuff actually delivered to his storehouses in West Africa – he maintains buying operations on the Ivory Coast, Indonesia and Ecuador) and invested another $1 billion in cocoa futures. London-based Armajaro is all about cocoa, a commodity that has risen 150% since 2008, and is threatening to soar beyond those rates based on Mr. Ward’s efforts. The July 24^th New York Times: “‘We even have our own weather stations — our very own that no one else has in some parts of the world,’ Mr. Ward, soft-spoken and tan, said in a video interview this year with a financial news service… With candy makers starting to stock up for the holiday season, they may be forced to pay him ever-higher prices… ‘The squeeze was really timed perfectly,’ said Eugen Weinberg, an analyst at Commerzbank in Frankfurt.” Mr. Ward appears to have profited handsomely from a similar “squeeze” in 2002, and with the harvest season coming up this fall, any shortfall could amplify Mr. Ward’s impact on the market.

While some have charged Ward with “manipulation,” so far the relevant exchange has indicated “no evidence of abusive behavior.” Will you be able to afford candy this year? “In any case, chocolate lovers should not worry too much, analysts said. Cocoa accounts for only about 10 percent of the price of most ordinary chocolate bars… The situation could change, however, if the next cocoa harvest falls short of expectations — or if Mr. Ward keeps buying.” The Times. You will probably pay a bit more.

I’m Peter Dekom, and while candy is dandy, chocolate is dicey and pricey.