When a week ago we observed the Onionesque reality of life in the Ivory Coast, where deposed president Gbagbo is threatening to wipe out bondholders of $2.3 billion in debt (Corporate Ticker: NUTZ) unless he becomes formally recognized, we made the following bold prediction: "we are sure that Blythe Masters and her team were recently in Yamoussoukro discussing the most effective way to corner the cocoa market (paper Cocoa ETF?), thus getting the price of the sweet powder up by a few trillion percent (in exchange for a nice 25% of all upside going to Jamie Dimon's firm of course)." Sure enough, when it comes to our track record of macabre predictions we continue to be near 100%. The FT has just reported that Alassane Ouattara, Laurent Gbagbo's opponent in the presidential election (and the man formally acknowledged by the UN as the country's president) has just imposed a one-month export ban of cocoa, ostensibly in an attempt to oust Laurent Gbagbo. In other words, the international community has to choose: bond recoveries or chocolate. That said, we are certain that it is none other than noted commodity market cornering expert JPM that can claim league table advisory credit for what according to the FT will be a 10% jump in the price of cocoa on opening Monday. The immediate retaliation by Gbagbo will most certainly be to force a technical default on the country's bonds which are already in their grace period, and start a localized mini liquidity (and solvency) crisis in Africa... As if the developed world did not have enough of those as is. And in the meantime, we sense a great disturbance in the inflationary Force, as if millions of fatty voices suddenly cried out in terror, and were suddenly silenced. Prepare for the next round of food inflation worldwide.
Cocoa is the main source of income for the government of Ivory Coast and any stoppage in exports would cut the funding Mr Gbagbo relies on to pay loyal civil servants and the military. Diplomats believe he needs about $150m a month.
Any reduction in supply is likely to push the price of the commodity used in chocolate towards a 33-year high because Ivory Coast accounts for about 40 per cent of global cocoa exports. The cocoa market closed on Friday at a 6-month high of £2,114 per tonne and traders fear prices could jump as high as 10 per cent on opening on Monday.
Alassane Ouattara, acknowledged by the UN as the victor in the recent disputed presidential election, sent a letter to leading cocoa exporters on Sunday ordering them to stop overseas shipments from Monday 24 until February 23.
“I am informing you to stop immediately all the exports of cocoa and coffee,” the letter, signed by Jeannot Ahoussou Kouadio, an ally of Mr Ouattara, says. “All operators which contravene this instructions would be exposed to national and international sanctions,” the letter, dated January 22, adds.
“Therefore, the registry of cocoa and coffee exports … is suspended,” the letter says. The Financial Times has obtained a copy of the letter, which was received by several top cocoa and coffee exporters in Abidjan, the commercial capital of Ivory Coast.
The decision to press for a cocoa blockade, comes as the European Union has tightened its own sanctions regime on Ivory Coast. Regional efforts to resolve the post election impasse in Ivory Coast continue to founder, however, leaving the country teetering on the verge of a new civil war.
West African states have warned they will use “legitimate force” to oust Laurent Gbagbo, who maintains control of the country’s army, if he continues to refuse to honour the UN-certified results of last November’s polls, which gave victory to Mr Ouattara.
Guess what this means for food producer margins? Nothing good:
Cocoa traders have taken the letter seriously and warned that exports could stop on Monday. “This is very serious; we have few options,” said the head of a leading trading house.
The world’s largest cocoa traders, including Cargill, Archer Daniels Midland, Barry Callebaut, Olam and Armajaro, were planning an emergency conference call on Sunday evening with the Federation of Cocoa Commerce, the industry body, to discuss the situation, said one person with knowledge of the conversations.
The FCC and the European Cocoa Association will co-ordinate the traders’ efforts on Monday. They were planning to send a letter to Mr Ouattara’s parallel government asking for some clarifications.
The letter imposing the export embargo allows the traders to continue buying cocoa in the local market, but traders warned that, without exports, the domestic warehouses at the port cities of Abidjan and San Pedro will soon fill.
All in all, another week of commodity fireworks is set to be unleashed. For those who took Standard Chartered's advice to "buy the West African dip" our condolences: "Standard Bank sees “significant upside potential” if a resolution to the dispute can be found, which may make the country’s debt sub-Saharan Africa’s best-performing international sovereign notes this year." For everyone else who took our tongue in cheek advice and bought the Cocoa non-commercial futures on the ICE, at 43,664 at last check, congratulations.
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