Members of London's futures exchange are pushing for a review of rules governing speculative positions in the cocoa market following a letter of complaint from traders angry at the extent of price manipulation.
On Friday, 16 European trading organisations wrote to Liffe – the London International Financial Futures Exchange – to say they were "shocked with what is happening on the London cocoa market", claiming it was causing havoc for producers and consumers.
The signatories, including the Association of the German Confectionery Industry, accuse the market of lacking transparency and control: "What we are experiencing today is clearly a manipulation of the contract which is bringing the London market into disrepute, and which, we believe, should not be allowed."
According to one of the signatories, a financial speculator has bought unusually large amounts of cocoa futures contracts, pushing their price to a 30-year record of £2,590 per tonne. Since the future contract expires on 15 July, traders with short positions will have to buy more contracts in the market to offset their position – but at record prices, few are willing to do so. Instead, they will be cornered into selling some of the physical cocoa that they hold. The sale – to the traders with long positions – will strengthen the power of those players even more, one of the signatories said. "We can't trust this market anymore; it's being manipulated," one signatory said. "We need the futures market to hedge, but this is killing everybody."
Since farmers in Europe and Japan started using futures contracts in the 18th century, commodity producers have relied on such instruments to protect them against volatile prices, caused by sudden weather changes or by any other catastrophe that could affect the crops.
Producers and traders complain that speculators cause such volatility that financial commodity exchanges become even less reliable than the physical market. "From the moment a market becomes purely a vehicle for speculation, it loses its usefulness," the letter said.
Market participants suggest the manipulator could be a fund or a financial institution, since buying as much as 250,000 tonnes of physical cocoa (held by the traders with short positions in the July contract) would cost £625m at current prices – a sum more likely to be available to a big fund or financial institution.
Funds and financial institutions control between 25% and 35% of all agricultural futures contracts, said a recent report by the UN Food and Agriculture Organisation. The price distortions that they cause alter investment plans in producer countries, usually developing nations. The Ivory Coast is the world's largest cocoa producer, followed by Ghana and Indonesia.
The Fairtrade Foundation said: "Financial players, it is now strongly suggested, destabilise markets not just for consumers but for farmers in the developing world who find it impossible to plan and invest for the future amid intense price volatility." According to the foundation, coffee prices spiked 20% in one week in June on speculation that a hedge fund was seeking to hedge its short position.
"It is clearly unfair that city traders make vast fortunes while small farmers in developing countries are receiving less than the cost of production for the goods they supply into global markets," said Toby Quantrill, Fairtrade Foundation's head of policy. "Small farmers are often net buyers of food and so are hit hard by rising food prices but are not in a position to take an advantage of short term commodity spikes."
Investment Banks, such as Barclays, Goldman Sachs and JP Morgan, have relied on commodity revenues as one of the drivers of recent profits, given the slowdown in credit and equity markets. Thousands of retail investors have also flocked to commodity funds, which have also sent gold prices to record levels.
Some market participants say that speculators add liquidity in the market, providing opportunity for buyers and sellers. Liffe said it was "sensitive" to the concerns expressed about the cocoa futures contract and stood by the market: "NYSE Liffe confirmed that its normal regulatory activities were being performed, including engagement with open position holders about their intentions, to ensure that business is conducted in an orderly manner."
But future changes cannot be ruled out, the Guardian has learned, in line with the forthcoming financial regulation in the US, aimed at reducing speculative trading at financial institutions. There is a debate to make Liffe similar to the New York-based Intercontinental Exchange (ICE), which limits trades from non-physical traders, or those only interested in financial contracts, rather than in the physical commodity. In the ICE market, cocoa has fallen to $2,969 a tonne, against $3,289 at the end of last year, according to Barclays Capital.
