A Chocolate Squeeze

by Elaine Schwartz    •    Jul 26, 2010    •    676 Views

One person might have purchased enough cocoa to make 5 billion chocolate bars. And, he is not even in the candy making business. Instead, he is doing what financial speculators have tried to do for centuries. He is trying to corner a market.

The man is Anthony Ward. His firm, Armajaro, does financial investing that includes commodities trading. One of those commodities is cocoa. Recently, he has purchased a lot of cocoa. 

Cornering any market requires massive buying, so much buying that little remains for anyone else. The result is control of supply and price. Typically, when a commodities trader makes a purchase of corn, for example, the seller locks in that price. Meanwhile, because with corn the buyer is purchasing a crop that will be harvested in the future, he has the opportunity to take advantage of a price rise. The seller gets security and the buyer is the speculator. Trying to corner a market just involves buying more.

In 1869, another financial speculator, Jay Gould, tried to corner the gold market. In the Gold Room, located near the Stock Exchange in NYC, traders bought and sold gold. When Gould’s agents (secretly working for him) started to buy and buy, the price of gold moved up. During subsequent months his men continued buying. Ultimately the U.S. government entered the market as a seller and foiled Gould’s plans.

In the wonderful 1983 film Trading Places, Eddie Murphy and Dan Aykroyd foil a plot to corner the orange juice market.

The Economic Lesson

There are many buyers and many sellers in perfectly competitive markets. As a result, no one controls price or quantity. Because all producers are price takers, they have to abide by the price established through the intersection of demand and supply.

Cornering a market involves taking control away from demand and supply. The demand curve is “hijacked” by an individual. As price goes up, other potential buyers are “squeezed” out of the market. The ultimate result, though, is control of the supply curve.   



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