Monday, July 26, 2010

Why Speculators are Parasites

Speculators cream an unusual portion of the profit from industry. Worse, they destablize markets. When they successfully corner a good, the price goes up. Suppliers respond to the "shortage" by increasing production. But the shortage is artificial, so at some point in the future, the hoarded goods are released onto the market (at an excessive price, that's the speculator's profit) and the price begins to plunge. If this maneuver has been done over sufficient time to induce suppliers to invest deeply in increasing supply, then the plunging price will dramatically plunge and wipe out suppliers which in turn creates a new cycle of shortage then over-supply. This is all in a "day's work" for a market manipulator. No good was served. But it effectively destroys a market.

That's the theory... here's the practice. From an article in the NY Times by Julia Werdigier and Julie Creswell:
In a stroke, a hedge fund manager here named Anthony Ward has all but cornered the market in cocoa. By one estimate, he has bought enough to make more than five billion chocolate bars.

Chocolate lovers here are crying into their Cadbury wrappers — and rival traders are crying foul, saying Mr. Ward is stockpiling cocoa in a bid to drive up already high prices so he can sell later at a big profit. His activities have helped drive cocoa prices on the London market to a 30-year high.

Mr. Ward, 50, is not some rabid chocoholic, former employees say. He simply has a head for cocoa. And, through his private investment firm, Armajaro, he now controls a cache equal to 7 percent of annual cocoa production worldwide, a big enough chunk to sway prices.

“Globally, he is unmatched in his knowledge of cocoa,” said Tim Spencer, a former Armajaro executive.

Armajaro maintains offices in West Africa, helping Mr. Ward keep tabs on major cocoa crops. “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.

Now, traders here are buzzing that Mr. Ward has placed an audacious $1 billion bet in the London market for cocoa futures. This month, he bought 241,100 metric tons of beans, they say.

His play has some people up in arms. While some see it as a simple bet that cocoa prices will rise on falling supply, others say Mr. Ward has created a shortage of cocoa simply to drive up the price himself.

The German Cocoa Trade Association and others wrote an angry letter to the London exchange on which cocoa is traded, demanding that it take action against what the association characterized as a “manipulation.”

The British news media has christened Mr. Ward “Chocolate Finger,” a nod to the Bond villain Auric Goldfinger. And on Facebook, someone has created a “Choc Finger” page featuring Mr. Ward’s face superimposed on a pig that is bellying up to the trough.

The fear is that Mr. Ward will become the go-to source until the annual cocoa harvest, which starts in October. With candy makers starting to stock up for the holiday season, they may be forced to pay him ever-higher prices — and cocoa has already jumped 150 percent since 2008.

“The squeeze was really timed perfectly,” said Eugen Weinberg, an analyst at Commerzbank in Frankfurt.

Mr. Ward and his firm, which has not acknowledged buying the cocoa contracts, declined to comment for this article.

Attempts to corner a particular market come and go in the rough-and-tumble world of commodities trading. During the 1970s, Nelson Hunt and his brother, William, tried but failed to corner the world market in silver.
I'm with the German Cocoa Association. The London exchange should step in an undo the monopoly of Ward. There is no benefit to society in letting this speculator distort the market!

Go read the article to get the full story.

I'm a great chocolate lover, but I'm on strike and will refuse to eat any more chocolate until I know that this monopoly has ended. If enough people refuse to play into the monopolists hands, he will lose a lot of money and society will be saved from the destabilization that his greed will have created. But it will take tens of millions of people agreeing to forego chocolate to have this impact. And sadly, this action has a side-effect of hurting innocent chocolate makers. But it is the only tool that ordinary people have to punish evil people like Anthony Ward.

The only other action people could take would be to picket his house and make life miserable for him, his wife, and his children until he rethinks his greedy attempt to extort "excess profits" out of ordinary people by cornering the chocolate market:
Mr. Ward lives with his wife and two sons in a four-story red-brick town house in the upscale Mayfair district of London.
In the good old days, the aroused public could show up with torches and pitchforks to make known their displeasure. But in the billion person world of today, an evil person like Anthony Ward can calmly hide from the public eye in his four-story red-brick town house in the upscale Mayfair district of London. Sad.

This guy isn't an innocent naïf, he has done this kind of speculation before and profited from it:
By most accounts, Mr. Ward profited handsomely by orchestrating a similar cocoa squeeze in 2002. That move, which earned him his chocolate-themed nicknames, caught the attention of financial regulators here, but their findings were never made public.

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