Last Thursday Rowntree Mackintosh announced a loss of £20 million incurred in dealings on the cocoa futures market. This will be reduced to £10 million because of tax relief.
The unprecedented upsurge of world commodity prices therefore has now reached the point where the dealings of a few days by a large and experienced company can wipe out roughly two years' profits. The company has not yet declared bankruptcy but was forced for a time to suspend dealings in its shares, whose price collapsed when dealing was resumed.
Rowntrees' error was probably in expecting a few weeks ago that the recent surge in the raw cocoa price would not last. Cocoa bought in West Africa was therefore sold on the cocoa futures market (for future delivery). This technique is used to protect companies against price falls during the period of transport of the material. When it arrives they can then buy it back at the current price. What happened was that prices continued to rise and Rowntrees were forced to buy back cocoa at much higher prices than they had earlier sold it for.
NOT THE FIRST
Rowntrees are not the first dealers to be caught out recently in the cocoa market. And, since other commodity markets are behaving in the same way, they will not be the last firm to be hit by the same problem.
Viewed in relation to any time period the 100 percent rise in commodity prices in the last 15 months is phenomenal. It is now close to surpassing the famous Korean inflation of 1949-51. When that inflation ended, prices remained fairly stable until 1964 when there was a surge in metal (but not other) prices which collapsed in the world-wide economic recession of 1970-71. What distinguishes the present runaway inflation is that it includes almost all the major commodities - metals, fibres and food.
There are three causes of the present price boom. Least important is the emergence of certain specific shortages in foods because of bad world harvests last year, and in metals because of factors such as the recent copper workers' strike in Chile. A second cause is the rapid increase in demand for raw materials produced by the present economic upturn in nearly all the major capitalist countries, combined with a shortage of productive capacity resulting from the abandonment of expansion plans in the producing countries during the recession of 1970-71.
MONETARY CRISIS
If these were the only causes then Rowntrees' gamble might have paid off. They lost their £20 million through ignoring the third most important cause - the world monetary crisis. This has meant a monumental flow of speculative funds into commodities as a protection against general inflation, which is producing a general decline in confidence in paper money. Most of this move of course is out of the sickest currencies, dollars and pounds.
The subsequent effect of this speculation is to worsen the position of these weak currencies even further, so that the process feeds off itself. Because the pound and dollar are being rapidly devalued relative to other currencies, the overall inflation of commodity prices is magnified in Britain and the US. For instance, in the last six months the price of copper in Britain has doubled; in Switzerland it has only risen by one third. As a result the British trade balance suffers a tremendous trade deficit (last month's remained terrible at £138 million) and costs of industrial raw materials and of food are going up faster than anywhere else.
As yet there is no sign of any break in the commodity inflation. But all speculative inflations have to end; and normally they do so rapidly and produce effects which will make Rowntrees' lost £20 million look like a dropped penny.