21/07/2010 Author: Gwyn Roberts

Editor's view: 22 July 2010

Journalism’s palette extends to mostly black, with a smidgen of white. Hardly a spectrum of colours, but effective enough if you want to paint an unsettling picture. Hedge funds frequently fall victim to this particular school of art; a series of unsubtle brush strokes rendering the industry as the unacceptable face of capitalism.

The latest story to add to this distorted portrait is Armajaro’s purchase of a substantial amount of the world’s raw cocoa supply. Largely reacting to the conventional forces of supply and demand, the fund manager has still become the poster-boy for the ‘unacceptable face of speculation’; stories that last did the rounds in 2008, when oil was nosing up to $150 a barrel.

There is a big snag here. Firstly, these stories completely negate the legitimacy of the futures markets, a series of legal and perfectly viable financial contracts. Secondly, there is nothing synthetic about Armajaro’s purchase. A physical transaction, with an exchange of cash for assets, this deal was completed the old-fashioned way, with the firm storing its 250,000 tonnes of cocoa in warehouses in Liverpool and Rotterdam.

Nor is Armajaro stockpiling the produce, as it waits for prices to skyrocket. Sources suggest that – despite some criticism from the globe’s chocolate manufacturers – the fund already has  deals in place with a number of large producers.

If the press can confuse the simple nature of this deal, they can easily fail to appreciate the legitimacy of commodity futures. These markets are well-regulated and are running smoothly. Recent price hikes in the value of commodities are not the result of rampant speculation, but based on good intelligence that supply chains are faltering and crops are less bountiful than anticipated.

Changing regulation means commodity futures are already becoming more transparent – clearly a good thing – but the current bleak press coverage is perfectly poised to create the sort of scare-regulation that has led to the current mess of the AIFM Directive – a disproportionate response that has clearly borrowed from the dark media palette.