Hedgefunds and cocoa production

The proposal to develop the cocoa industry in conjunction with a hedgefund raises two issues. Firstly, what a hedgefund is, and secondly, whether or not we have the capacity to produce the quantity of cocoa required at competitive prices.{{more}}

A hedgefund comprises a manager and other investors who put their money into a fund. The object of the fund is to make even more money for the participants. They do this by anticipating the price of commodities, shares, bonds and even currencies. They buy, say, an assortment of shares knowing full well that the price of some shares will go up while that of others will go down. By buying shares that can go either way, they have hedged their bets. They expect, however, that when they sell the shares, the profits from the shares going up will be greater than the losses from the shares going down, thus leaving them with a net profit.

Two further points ought to be noted. Hedgefund operators, in addition to their own funds, often borrow heavily so they can increase the size of their transactions and their profits if their predictions turn out to be accurate. Secondly, over the years with the aid of mathematics, econometrics and computers, more and more sophisticated models have been developed to predict prices.

Some hedgefunds have been stunningly successful. About 55 hedgefund managers are among the 1000 persons in the world who are worth over $12.5 billion. No wonder a recent book on hedgefunds was simply called: ‘More money than God’ There have also been some spectacular failures. One group of eggheads, including 2 Nobel prize winners, thought they had devised the ultimate predictive model. It crashed, threatening to carry down the US banking system with it. The Federal Reserve, that is, the central bank of the USA, had to step in to save the day. The story is told in a book piquantly entitled “When genius failed.”

Cocoa seems to have long fascinated the operators of hedgefunds. In the sixties, a student at MIT developed a model for predicting cocoa prices as his Ph. D thesis. It eventually turned out to be sound; he made a lot of money and went on to be a successful hedgefund manager. On a more sombre note, a billionaire hedge fund manager in the USA was last week found guilty of wrongdoing and could be jailed for 20 years. They say he did not really predict from models but got inside information from the firms in whose shares he was dealing. Obviously, then, we need to know as much as we can about the particular hedgefund with which we are involved. After Clico and Stanford, it would only be wise to exercise caution in negotiating with the foreign private sector. We turn now to our capacity to produce cocoa.

According to the last Agricultural Census, we had 18,000 acres of farmland divided into 7,000 holdings. 71 per cent of these were made up of holdings that were 2 acres or less. I cannot see these as being fully commercially viable operations, so I am always arguing that they be treated as backyard gardens on which people can grow their own food and sell the surplus. Fortunately, the other 29 per cent of the holdings comprise the bulk of the farmland, about 15,000 acres in total. We have to ascertain how much of this land is capable of producing cocoa. Since most of the land is in private hands, we need to know how much of it the owners are prepared to put in cocoa and whether they will have the labour force that would enable them to do so. Probable yields and the cost of inputs need also to be estimated. We have never been able to produce arable crops at internationally competitive prices. Sugar, cotton and bananas have all had to rely on protected markets. Cocoa, however, is a tree crop.

Post- harvest operations have to be considered. Some farmers recently formed a company to buy, transport and sell produce in the neighbouring islands. Cooperatives, however, have a longer history in SVG. A division to promote cooperatives was established in the Ministry of Agriculture as long ago as the 50s.The Arrowroot and Banana Associations started as cooperatives, but farmers only wanted to cooperate when it suited them, and so membership had to be made mandatory for growers. Care always has to be taken to ensure that the cooperatives do not become devices for extracting money from Government.

The Department of Agriculture was set up primarily to introduce new crops and new techniques into the agricultural sector. We were considered too small to do our own fundamental research, so we were linked first to ICTA and now to CARDI. In SVG, however, we did or were supposed to do applied research, that is, investigations aimed at solving immediate problems. The Department must do its job. From Cardi, from journals, from staff visits to the more dynamic centres of tropical agriculture abroad it must come up with new and lucrative ideas. From whatever source the ideas come the Department ought to do a full assessment of their viability before they become projects and move into the public domain and political arena. One hopes it is not too late for this approach to be tried in regard to the cocoa proposal. We are not concerned with scoring political or agronomic points but in getting SVG going.