Hedge Fund Sends Cocoa Prices Soaring. Should You Invest?

Two years ago when the recession hit and hedge funds needed a place to stash their money they looked to commodities such as oil, corn and rice. Prices rose and then jumped even higher as fears of shortages spread. Then, as the global economy improved, commodity prices eased back to more sustainable levels.

Now economic jitters have returned and hedge funds need a new investment. For one London-based fund, that commodity is cocoa, and chocolate lovers are not impressed.

Cocoa prices on the London market rose to a 33-year high of £2,732 ($4,379) a tonne last week, and it's not because there was a sudden shortage in supply. Anthony Ward, a hedge fund manager at London-based Armajaro, has bought up almost Europe's entire supply of cocoa - or 7% of the world's crop - enough to manipulate market prices, according to media reports in The New York Times and the Financial Times.

So is there going to be a shortage of cocoa beans, and should you invest in cocoa?

Some market players believe Mr. Ward has made this investment in cocoa because he predicts a shortage in cocoa beans, and indeed, he is reported to have offices in West Africa and his own weather stations to keep a close eye on the cocoa crop. So it is possible he knows something others have not picked up on yet.

But there appears to be more to this play than just a shortage in production. Many believe it is Mr. Ward who has created the shortage by hoarding 7% of the crop - a strategy that is called a "squeeze." The large purchase coincides with the time of year that candy makers begin to stock up on supplies for the holiday season. And with the main cocoa bean harvest not due until October, many producers will likely have to buy cocoa beans from Mr. Ward at high prices.

It is then entirely possible that cocoa prices will remain elevated at least until the October futures. The good news for chocolate lovers is that prices of chocolate bars at the store should not rise by too much because cocoa only accounts for about 10% of the cost of its production.

More on investing:
Female Financial Dilemma: Shoes or Stocks?
Pick Your Mutual Funds Carefully
What's Good, Bad and Downright Awful in Canadian Investments