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Concerns in the cocoa market

July 9th, 2010

Cocoa prices have sparked allegations of manipulation in the London market.

Sixteen European cocoa industry participants have sent a letter of complaint to NYSE Liffe, the global derivatives business that runs futures and options markets in Amsterdam, Brussels, Lisbon, London and Paris, saying the extent of speculation on the London cocoa market could drive them towards using the US-based Intercontinental Exchange.

None of the largest cocoa trading companies, however, such as Cargill, ADM, Olam, Touton and Barry Callebaut, signed the letter.

“NYSE Liffe is aware of concerns being expressed by some customers about current conditions in the nearby delivery months of the cocoa futures contract,” the exchange says in a statement.

One signatory notes, “We believe that the London market has lost its capability to function as a hedging tool. There is a deep feeling of dissatisfaction because the London market is non-transparent.” As there is no transparency on what proportion of the positions held on the London market are from speculators, it is difficult to substantiate what their influence is on prices.

The London market is not regulated as heavily as the New York market, where the US Commodity Futures Trading Commission has been cracking down on speculation and already requires companies to give more information on their activities than Liffe does.

Dealers said they have been expecting Liffe to introduce a report showing fund positions in the market, but there is no timeline for when it would be launched.

The London cocoa market outperformed the US cocoa market in the first half of the year, which some dealers attribute to increased fund investment.

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