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07/29/2010 12:34 PM

Choc Finger's Big Bet

Speculators Rediscover Agricultural Commodities

By Susanne Amann and Alexander Jung

With the financial crisis fading into the past, speculation on agricultural commodities markets has returned in force. Food prices are
climbing once again as hedge funds rediscover the immense profits that can be made -- led by a British chocolate baron.

Even by the standards of London's exclusive Mayfair neighborhood, businessman Anthony Ward leads a luxurious lifestyle. He and his family live in a
500-square-meter (5,380-square-foot) townhouse with five bedrooms, each with its own bath. There are separate quarters for the staff. When Ward
opens a bottle of wine on his veranda in the evening, it's likely that it comes from his own vineyard at the foot of Paardeberg Mountain near Cape
Town.

Ward's fabulous wealth comes as a result of his involvement in the cocoa business. The 50-year-old Briton with the nickname "Choc Finger" heads
Armajaro, a commodities business and hedge fund he co-founded in 1998. In recent weeks, the hedge fund has caused a furor in the commodities
markets. Traders report that Ward has purchased a vast number of futures contracts for the delivery of 241,000 tons of cocoa worth $1 billion (€770
million).

The cocoa represents about 7 percent of annual world production, enough to supply Germany with chocolate for an entire year. It was also enough to
substantially drive up prices on the cocoa market. Last week, the price of cocoa climbed to a 33-year high.

What is so unusual about the British investor's coup is that he did not resell the contracts on the London International Financial Futures and Options
Exchange (LIFFE) before they expired, but instead took delivery of the beans. As a result, Armajaro now controls almost all the cocoa beans currently
stored in registered warehouses in Europe, from Liverpool to Rotterdam to Hamburg.

Turbulence in the Cocoa Market

Processors and traders are now accusing Ward of trying to corner the cocoa bean market. "The market is increasingly being manipulated by a few
people who control the market positions," says Hamburg cocoa dealer Andreas Christiansen, adding that speculators are taking advantage of the lack
of transparency on the LIFFE. This, he says, harms smaller traders, whose hedge transactions are now no longer adding up. "A lot of people have been
harmed here." Ward himself has declined to comment on these accusations.

The turbulence in the cocoa market is the most recent sign that speculation is back, and that the international financial markets have rediscovered
agricultural commodities.

They are now betting big again on commodities like wheat, coffee, rice and soybeans. As a result, prices are no longer determined by supply and
demand, but by investment banks and hedge funds.

Cocoa isn't the only commodity that has become significantly more expensive in recent months. The price of wheat has gone up by 17 percent since
April, and soybeans by 12 percent. At the beginning of the year, sugar prices climbed to their highest level in three decades in the space of only a few
months and then plunged by almost half. But now sugar prices are back up, climbing by almost 6 percent since April.

The food price index of the United Nations Food and Agriculture Organization (FAO), which aggregates price movements for key agriculture products,
climbed to 163 points in June. This is only 15 percent lower than the all-time high of 191 points in 2008, the year of the financial crisis.

Price Explosion

At the time, rice prices rose by 277 percent within only six months, and corn became so unaffordable that millions of Mexicans could no longer afford
tortillas, a staple in the country. Hunger riots erupted in Haiti, Egypt and more than 30 other countries.

Driving the price explosion was the growing use of agricultural commodities to produce biofuel. But 2008 was also the year in which, for the first time,
the public realized that grain merchants were no longer the only ones trading on the exchanges (in their case, by buying grain futures to hedge against
poor harvests), but that the major players in the financial markets had discovered the lucrative trade in agricultural commodities.

Last year, Goldman Sachs earned $5 billion in profits with commodities alone. Other major players include the Bank of America, Citigroup, Deutsche
Bank, Morgan Stanley and J.P. Morgan.

They are no longer merely offering classic funds, but are now trading in financial instruments that function similarly to the subprime mortgage loans on
the now-collapsed US real estate market. With these instruments, known as collateralized commodities obligations, or CCOs, profits are based on
market prices. The higher the trading prices of wheat, rice and soybeans, the bigger the profits. The market's behavior reminds one of the Internet
bubble at the beginning of last decade and the fluctuations just prior to the financial crisis, then-Merrill Lynch President Gregory Fleming said in May
2008.

Indeed, only about 2 percent of commodities futures now end with a real exchange of goods, the FAO concluded in a June study. "As a result, these
deals attract investors who are not interested in the commodity itself, but merely in speculative profit," the FAO concludes morosely.

The finding is all the more remarkable given the widespread political and social outrage aimed at food speculators just two years ago. But little has
changed since then. "Paradoxically, the financial crisis resulted in a brief pause for breath on the agricultural markets, but as the global economy picks
up steam, the problems of scarcity are getting worse again," warns Joachim von Braun, an agricultural economist at the Bonn-based Center for
Development Research and director of the renowned International Food Policy Research Institute in Washington.

Threatening Harvests

Even as trading in agricultural commodities is on the rise again, the underlying factors that have driven up food prices for years have not been
eliminated. The production of ethanol and biodiesel still competes directly with food production. Energy is still so expensive that the costs of fertilizer
and transportation make agricultural production unprofitable. And with 2010 shaping up to be possibly the hottest year on record, droughts in Eastern
Europe and West Africa are threatening harvests.

Officials at the United Nations World Food Programme (WFP) already fear the worst. "The situation in many countries is already dramatic now," says
Ralf Südhoff, director of the WFP office in Berlin. The sad record of more than a billion starving people worldwide could be surpassed this year.

The dire situation has prompted experts like Braun, as well as aid organizations and companies, to call for tighter regulation of financial markets. In
March, Andreas Land, the managing partner of baked goods maker Griesson-De Beukelaer, complained that certificates were being traded for 60
million tons of cocoa, which he said was 20 times the annual volume of cocoa that was physically available. "This is neither good nor tolerable," said
Land. "Speculating with food products shouldn't be allowed, unless you actually take delivery of the products."

Strictly speaking, it is re-regulation that many would like to see. In the United States, for example, the Commodity Exchange Act of 1936 limited
speculation in agriculture commodities for decades. But thanks to the targeted lobbying activities of the financial industry, the law was watered down in
the 1990s, leading to a sharp increase in the trading of food commodities. This shift has prompted agricultural economist Braun to call for more
transparency, particularly when it comes to the question of who buys which contracts. "And second," says Braun, "we need to require higher capital
investments on the part of traders, which would make speculating in basic food products less attractive."

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Not Behaving as Planned

US President Barack Obama has already taken a step in this direction by making derivatives trading more transparent. The Europeans, on the other
hand, are balking at taking even this first step to contain speculation.

EU Commissioner for Internal Market and Services Michel Barnier, who has described speculation with food products as "scandalous," plans to introduce
legislation this year to impose stricter regulations. But the British have already announced their intention to create their own, less stringent rules for
the London exchange. This comes as no surprise; London is the world's largest market for agricultural commodities outside the United States.

Cocoa king Ward, in other words, need not fear that his business will be restricted any time soon. Nevertheless, it is far from certain that his current
massive bet will turn out in his favor. Worldwide demand for cocoa is growing, especially in Asia. But bad weather in the Ivory Coast, which produces
40 percent of the world's cocoa, does not bode well for a good harvest this fall. Ward is betting that chocolate makers like Lindt & Sprüngli or Kraft will
soon have no choice but to order from him at higher prices, especially now that the Christmas business is around the corner.

The markets, for their part, have not behaved as planned. Immediately after Ward's coup, the price of cocoa beans dropped by more than 7 percent in
three days.

But even should it turn out that Choc Finger made a bad bet, traders and processors are no longer willing to put up with such escapades. A group of 20
companies and associations has written a letter to the LIFFE demanding that it make trading more transparent, using the New York markets as a
model. The New York exchanges regularly publish information on who is trading in the market, whether they are speculators or agricultural
commodities traders, how many contracts they hold and what their positions are.

This week, critics of speculation were to hold talks with the managers of the LIFFE. "Everyone should be given the same opportunities," says cocoa
dealer Christiansen. Still, it is hardly likely that new rules will be in place by the next maturity date for cocoa contracts in mid-September. In other
words, cocoa speculator Ward still has some time left to win his bet.

Translated from the German by Christopher Sultan

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