By Marcelo Teixeira
NEW YORK (Reuters) -Chocolate maker Hershey Co said the ICE New York cocoa futures market is currently disconnected from the reality of the global physical market due to exchange actions that have reduced liquidity and increased volatility.
Tricia Brannigan, Hershey’s vice president for procurement, told Reuters on Tuesday that high margin calls on ICE’s cocoa futures market drove commercial players away, reducing open interest and causing sharp price swings.
ICE declined to comment.
ICE cocoa futures prices in New York and London have fluctuated wildly in recent months after hitting record highs in both markets late last year due to production problems in Africa.
Prices in New York, for example, fell 10% on Monday, before rising 5% on Tuesday.
“ICE is not providing an orderly market for buyers and sellers,” said Brannigan, noting that the cocoa futures market is no longer providing price transparency or helping companies to hedge risks.
“The (futures) market is not functioning properly.
Commercial players are leaving the market,” Brannigan said, referring to chocolate companies and commodities traders who normally use futures to reduce risks from price swings.
ICE has increased margin calls, or the deposits market players have to make as a guarantee for their positions, as prices went up last year.
This is a major reason why commercial players have reduced their participation in the futures market, Brannigan said.
The situation adds to the lag between futures and physical markets.
“We believe physical market prices are significantly lower right now,” Brannigan said, adding that considering stocks-to-grind ratios, a measure of demand, prices should be in the range between $3,000 to $5,000 per ton in New York.
They closed at $8,212 on Tuesday.
Brannigan suggested the exchange could take some measures to deal with the problems such as setting price oscillation limits or cut margin calls for commercials.
Brannigan also suggested that ICE could investigate speculators’ activities to check if there are any disruptive behavior.
(Reporting by Marcelo Teixeira; Editing by Richard Chang and Will Dunham)
