Wednesday, May 28, 2008

Wall Street Journal Evidence That Speculators Are Responsible for the Run Up in Oil?

The Journal article does not discuss oil, but chocolate. Even so, the article is of interest because it dismisses the idea that fundamentals are responsible for a rapid increase in prices.

The only speculator quoted responded that speculation can only cause higher prices in the short run because farmers can plant more trees. How long does a tree take to mature.

Patrick, Aaron O. 2008. "Candy Companies Blame Higher Prices On Hedge Funds' Chocolate Cravings." Wall Street Journal (28 May): p. C 1.

Soaring cocoa prices are driving up the cost of chocolate around the world. The chocolate industry points its finger at speculative buying by professional investors, especially hedge funds.




"They definitely influence the market and the prices," says Bernd Rossler, a spokesman for August Storck KG, one of Germany's bigger chocolate makers. "There is a lot of money invested in [cocoa], and it is coming from hedge funds."

Shipped around the world as a powder, paste, liquor or butter, cocoa sells for about $2,600 a metric ton on New York's Intercontinental Exchange, up from $1,700 at the beginning of 2007.

Cocoa investors acknowledge that they can affect prices but say their influence is strictly short term. Any increase in prices should lead to farmers growing more cacao trees, which produce cocoa beans, driving prices down again, they say.

One of the puzzles behind the cocoa-price increase is that it doesn't appear to reflect an imbalance between supply and demand. In the year ending in September, there will be almost enough cocoa grown to meet the world's needs, according to the International Cocoa Organization, a trade group. The expected 51,000-metric-ton shortfall isn't particularly large and can easily be covered by existing stock, the group says. "The fundamentals do not justify this price, and I haven't heard of any other explanation other than [investment] funds," says Hagen Streichert, a German government official and the spokesman for cocoa-buying countries on the International Cocoa Council.


11 comments:

Anonymous said...

I have the same reaction to this story as Paul Krugman does about oil: we need to see movement in the inventories to think that it's speculative activity.

I interpret this text to imply that inventories are not going up
"Cocoa investors aren't interested in physically owning cocoa"
and
"One of the puzzles behind the cocoa-price increase is that it doesn't appear to reflect an imbalance between supply and demand. In the year ending in September, there will be almost enough cocoa grown to meet the world's needs, according to the International Cocoa Organization, a trade group. The expected 51,000-metric-ton shortfall isn't particularly large and can easily be covered by existing stock, the group says."

If there's no run-up in inventory or final demand, then how are futures prices getting transmitted to the spot price? Tyler Cowen thinks that oil companies are implicitly increasing their inventories by intentionally restricting production (http://www.marginalrevolution.com/marginalrevolution/2008/05/does-the-high-o.html) but does anyone think that the Ghanaian farmers are following the same path?

The article notes that "chocolate sales rose 6.9% in 2007", current demand exceeds current supply (a "51,000-metric-ton shortfall") and that "prices of high-quality chocolates rose 6.1% in the year ended April 19". So demand is up 7 percent and prices are up 6 percent... that doesn't seem like such an outrageous short-run elasticity, especially since supply is constrained in the short run (those trees take a few years to grow).

Shag from Brookline said...

How about a book title "Chocolate for Oil"?

Myrtle Blackwood said...

It looks a lot like peak oil to me:

Global Oil Output Peaked in 2006 - German Think Tank
http://www.planetark.com/dailynewsstory.cfm/newsid/44955/newsDate/23-Oct-2007/story.htm

Wikipedia. http://en.wikipedia.org/wiki/Peak_oil Accessed 25th November 2007
"..Of the largest 21 fields, about 9 are already in decline.[43] Mexico announced that its giant Cantarell Field entered depletion in March, 2006,[44] as did the huge Burgan field in Kuwait in November, 2005.[45] Due to past overproduction, Cantarell is now declining rapidly, at a rate of 13% per year.[46] In April, 2006, a Saudi Aramco spokesman admitted that its mature fields are now declining at a rate of 8% per year, and its composite decline rate of producing fields is about 2%.[47] This information has been used to argue that Ghawar, the largest oil field in the world and a field responsible for approximately half of Saudi Arabia's oil production over the last 50 years, has peaked.[48][49].."

2008 – May 29th. Indonesia becomes a Net importer of oil. It will pull out of OPEC at the end of the year.
Indonesia pulls out of OPEC
Southeast Asian country leaves oil cartel, as declining investment in oil production leads to low export levels.
May 28, 2008: 7:14 AM EDT
http://money.cnn.com/2008/05/28/news/international/indonesia_opec.ap/index.htm?postversion=2008052807

2008 – May 23rd. The International Energy Agency (IEA) is said to be producing a study showing that future oil supplies will be more restrIcted than had been thought, topping out at about 100 million barrels per day…current production is only around 85 million barrels per day.

2008 – May 27th. Germany moves to ban speculation on oil. Opec oil shipments fell by 1m barrels per day in the four weeks to May 4.
Germany in call for ban on oil speculation
By Ambrose Evans-Pritchard
Last Updated: 12:53am BST 27/05/2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/cnoil126.xml

Michael Perelman said...

Anonymous's comments seem sensible. If, however, future prices rise enough, sellers might resist selling unless they can get higher prices.

Anonymous said...

Some interesting points made, but no-one addresses a key point in the story: how do you explain the increase in cocoa spot prices from $1700 a tonne to $2600 over the last two years? Demand is up only 6% and there is only a small production deficit. I can't see how producers' costs could have increased much, even with higher trasnport costs.

Anonymous said...

Seems to me that WSJ article was a dog whistle to the real issue: oil. Since they feel they can never be seen to criticize the heavy movers (or just call them the "Heavies") on Wall Street or ever call for any sort of increased government oversight, they've expressed their nervous plucking at the quilt with this mode of arcane parable. Much was done like this in courts of old when expressing doubt about a Regent's plans and actions. Working in IT I've had occasion to bump up against the higher Plutocrats in "high finance" and I can't say I blame the WSJ for shying away from target. Although that's not what they're paid for, right?

Michael Perelman said...

I had the same feeling as Darryl, which is why I mentioned oil in the title of the post.

Daro said...

Yeah, exactly Michael. I didn't mean to claim credit over you being the one sharp enough to spot this article and tie it up right away with oil. You've covered 2 points with the one piece:
1. even the WSJ thinks there's speculation
2. They're too craven and/or beholden to put their money where their mantra is and call it out on Big Business

Anonymous said...

Some interesting points made

Otto said...

Interesting or not, how can we quantify the speculators influence into the oil market? Is it the actual hedge fund money being manipulated to increase futures contracts or is it a fundamental scarcity driven supply and demand economics problem? Can economics prove or disprove the speculator theory?

And another issue I have, is that no one is taking a stance on the reasoning for the recent increase in the energy futures? Now it seems the Wall Street Journal is scared to take a stance on the matter. It being an election year, none of our fearless leaders are saying one way or the other. I love the plan to cut out the federal excise tax on gasoline for the summer! Wow, save the driver about 100 bucks, while we stick it to the diesel driven goods and services markets.

Can someone help me understand this huge dilemma that the American and the World economy is facing?

Anonymous said...

Good JOb!: )