The Armarajo hedge fund’s corner in the cocoa market in 2010

In this article, Mathis DIALLO (ESSEC Business School, Grande Ecole Program – Master in Management, 2023-2026) explains the story of the hedge fund’s corner in the cocoa market created by Anthony Ward in the 2010’s, and its repercussions.

Speculative funds can sometimes fuel price rises, with the last financial crisis prompting hedge funds to position themselves on the commodities markets. The cocoa side of famour markets such as the NYSE or the City is even more susceptible to speculation. Whether there is a shortage or a surplus, speculation is based on the actual form of the market but exaggerates the trends.

Anthony Ward
Logo of Angie
Source: The Guardian.

The financial operation of the British hedge fund Armajaro

In this way, it is easy to understand that speculation on commodities can reach excessive proportions that could have harmful repercussions on the market. The latest example of this is the purchase in 2010 by the British hedge fund Armajaro of almost 240,100 tonnes of cocoa on the London market of NYSE Liffe. This is equivalent to 7% of world production, or 15% of global stocks.

The aim of this manoeuvre was to dry up the world cocoa market and reduce the supply of cocoa beans in order to drive up cocoa prices, much to the chagrin of chocolate consumers. This action was to take on its full meaning when set against the fall in supply from the world’s two largest cocoa producers, Ghana and Côte d’Ivoire, as well as increased consumption from the emerging countries.

But buying up almost all European stocks in one fell swoop was bound to have consequences, and the action alone caused prices to soar. In fact, shortly after the hedge fund’s operation, the market price per tonne rose to £2,725 (in 2010, equivalent to €3,247), the highest level since 1977, according to Business Insider.

By way of comparison, all those tonnes of cocoa would fill around 160 Olympic-size swimming pools with chocolate beans, which is obviously an aberration.

Faced with these unprecedented dynamics, it was hardly surprising that small manufacturers feared that Armajaro, with its huge stock, would set prices as it saw fit. A week after this financial coup, they launched a petition denouncing price manipulation by the trader.

The high-risk corner strategy

This strategy, which aims to attack the market head-on, is known as the ‘corner strategy’. This was not Anthony Ward’s first attempt at such a strategy. Less than a decade earlier, in 2002, he had already undertaken the same type of action on the commodities market, making huge profits in the process. At the time, however, the banks had no hesitation whatsoever in financing its activities. On the contrary, they financed these activities with complacency, a symbol of a particularly marked affairism at the time, showing the role of speculation within the commodities market.

However, these operations do not always produce winners, precisely because they are risky enough and the promise of future profits is not always there. This is somewhat the case here. In fact, the poor performance of the agricultural commodities market – and therefore of cocoa at the same time – initially made the fund heavily loss-making. Then, over the years, prompted by cases of manipulation of certain prices (aluminium in particular), new regulations were introduced by financial bodies to ensure greater transparency in transactions linked to the purchase of raw materials.

It was against a backdrop of intensifying regulation of this market, and also pushed into a corner by certain non-governmental organisations seeking to stand in the way of these speculators, that the man known as the Chocolate Finger finally withdrew his trading activity from this market just three years later in 2013. Eventually, the trader got rid of his cocoa, coffee and sugar trading arm.

Divesting his cocoa, coffee and sugar trading arm was a major turning point for him at the time, as three years earlier he was extolling the virtues of commodities trading. Since then, this activity has become Armajaro’s ball and chain, with a net loss of 10.3 million dollars in 2012 compared with profits of 24.3 a year earlier. That was the end of the empire.

Why should I be interested in this post?

Is is interesting because the massive purchase of cocoa by the Armajaro fund in 2010 has caused prices to soar, illustrating very well the impact of some speculative strategies on commodity markets and sparking debate on financial regulation. It has also affected a lot producers‘incomes and consumers’ costs.

▶ Mathis DIALLO The environmental impact of cocoa

▶ Mathis DIALLO The cocoa production

▶ Mathis DIALLO The price of cocoa

▶ Mathis DIALLO Different types of chocolate