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.

http://online.wsj.com/article/SB121192457563024139.html?mod=todays_us_nonsub_money_and_investing

“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.”

2 comments so far

  1. Bruce on

    I’m not an economist, but how much of this increase can be explained by the weakening dollar?

  2. mperelman on

    The dollar has indeed weakened, but not nearly enough to explain the problem. Also, a weakened dollar would not affect the European candymakers quoted here.


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