West Africa collectively supplies two thirds of the world’s cocoa crop, with Ivory Coast leading production at 1.8 million tonnes as of 2017, and nearby Ghana, Nigeria, Cameroon and Togo producing additional 1.55 million tonnes.
Markets and Pricing
The cocoa market has been on a wild ride over the past year. Between July 2016 and July 2017, global cocoa prices fell by more than a third. Production of the crop was expected to shrink due to poor weather in some key growing regions, leading to increased prices. But, the opposite ended up happening. There was plenty of rain, and current estimates suggest global production will increase by 15 per cent in the 2016-17 season from the previous year.
Whereas a definite amount of unpredictability is projected, the price sink exposes serious pain points in the cocoa value chain. Much of the decline came after the Ivory Coast government set the mandatory minimum farm gate price in October 2016. With the global market offering less than the government asking price, buyers have backed out. Processing facilities have shut down, waiting for higher market prices. Exporters, having secured rights to purchase cocoa in bulk, are declining to exercise them.
Prices have inched back up in recent weeks, indicating that the worst of the crisis may be over. The fact that so much chaos could come from an ostensibly positive event suggests that there are structural problems in the country’s cocoa sector that need to be addressed. A regulatory system that better protects cocoa farmers during times of crisis would also reduce the risk of meltdown in market mechanisms.
Before the 2016/17 season, poor weather had reduced global cocoa supply. As expected, lower production in Ivory Coast and Ghana led to a spike in prices for the first half of 2016.
Ivory Coast bet big on a continued slump following another weak harvest. Cocoa exporters bid on contracts before any real trends could be established in the October-March harvest season. These orders were used to set a minimum farm gate price by the Conseil Cafe Cacao (CCC), the regulatory body for cocoa and coffee in Ivory Coast. The price was set at 1,100 CFA francs per kilogram for the 2016-17 marketing year in October 2016, just as the harvest was set to begin.
Speculation on a market as opaque as cocoa includes inherent risks which may lead to big losses. The traders thought another poor harvest was just around the corner and bet prices would rise. Therefore, a combination of good weather and slumping cocoa demand could spell trouble for Ivory Coast. Increased rainfall began with the October-March harvest in West Africa, which was good news for farmers hoping for a better season.
Within the same period, there was also a lack of demand in Europe. The common measure for cocoa demand, grindings, stagnated. Possible causes for the downturn include worries over Brexit, a hot summer, and recent wellness trends. By the time farmers were ready to sell, the prices that wholesalers were willing to pay were already lower than Ivory Coast’s set farm gate price.
Exporters and producers could not purchase cocoa at the price set by the CCC if they wanted to make a profit. Trucks laden with cocoa sat at ports for months due to a lack of buyers. Of the purchases that were completed, several were rejected because of rotten beans. Ivory Coast’s miscalculation is a costly one for the country. Cocoa beans, paste, and butter account for 40.2 per cent of Ivory Coast’s exports by value. Ivory Coast had to review its 2017 budget because of the drop in sales. The West African country also asked for additional funds from the International Monetary Fund to cushion it going forward.
Ghana is the world’s second largest cocoa producer with an annual production of 750, 000 to I million tones. In the past decade, the chocolate industry’s demand for the product has gone up 12 per cent but production has stagnated.
While the demand, especially from developed economies like India and China is a positive sign for the Industry, the more than 6 million cocoa producers, most of whom are small-scale farmers, face a myriad of challenges ranging from poverty, poor connection to infrastructure from producers to consumers.
But the Ghana Cocoa Board (COCOBOD) established in 1947 has had a history of overseeing the sector, ensuring that it remains on track despite the challenges.
The board serves as the only exclusive marketing intermediary between producers and processors of the crop.
Markets and pricing
The global market share for this second leading cocoa producer is estimated at 20 per cent.
The marketing year for cocoa begins in October, when harvest of the main crop begins, followed by the harvest of a smaller “light crop” in July. Light-crop beans are smaller than the main-crop variety, but are identical in quality and grown on the same trees. The main crop accounts for 90 per cent of total annual cocoa bean production in the country, and the light crop accounts for the remaining 10 per cent.
During the 2015/2016 harvesting season the country produced approximately 800,000 metric tones , which was 20 per cent of the total world harvest.
Until a couple of years ago, cocoa generated around a third of Ghana’s export earnings. This share decreased due to the start of oil production. In 2014, cocoa was the third largest export product with a share of 20 per cent.
It is estimated that during the 2016/17 a total output of 850,000 will be produced.
Collective cocoa bean purchases by the Ghana Cocoa Board in the 2015/2016 season reached 778,000 tones, representing an increase of around 38,000 tones compared to the previous season. Although production fell short of the Government’s estimated target, it exceeded the low level of the previous season.
For the 2016/2017 season, the Government announced an increase of the guaranteed price paid to cocoa farmers to GH¢7,600 per tone (US$1,914) As at 22nd October 2016, cocoa purchases in Ghana, as reported by News Agencies, reached approximately 200,000 tones.
Cocoa production in Ghana was and is a major contributor to the tax income of the government. There are approximately 800,000 cocoa farmers in Ghana. Cocoa is grown on an estimated 1.9 million hectares. The cocoa industry employs about 60 per cent of the total labor force of the agriculture sector; most cocoa farmers are smallholders who harvest cocoa on 2 to 3 hectares with a yield of on average 400 kg/ha. Including families of farmers, employees of trading companies and input services, the cocoa sector provides income for more than 1 million Ghanaians.
The cocoa sector is one of Ghana’s economic backbones. Ghana is not only the second largest producer of cocoa in the world, but it produces the world’s highest quality cocoa. The cash crop accounts for about 9% of Ghana’s GDP and makes up about one-third of the country’s export revenues, totaling over US$ 1.5 billion.
Additionally, cocoa is an important tool to guarantee the liquidity of the Ghanaian government. The government issues every year a bond, which is secured by the predicted income from selling the cocoa of the next harvest. Potential investors know that due to the forward cocoa selling system the bond is a low risk investment. The Ghanaian government pays for the bond at much lower interest rates than it would have to pay for a bank loan.
Cocoa traders speculating on the continued rise of cocoa prices in mid-2016 were proven wrong after a bumper crop in West Africa saw production quantity jump by double digits. Traders in both Ivory Coast and Ghana were already locked into trade agreements requiring them to purchase, if they chose to, well above the current market price. Archaic rules that were supposed to help farmers led to a disaster for them and a serious inconvenience for many others.
Cocoa, like coffee, is one of a handful of agricultural commodities grown exclusively in tropical regions and consumed overwhelmingly in Europe and North America. Cocoa, however, is more extreme than coffee in how uneven its value chain is, funneling only a small fraction of its final retail value back to farmers.
The continued presence of quasi-governmental organizations like Ivory Coast’s CCC and Ghana’s COCOBOD likely causes much of this dysfunction by adding an extra layer between the world market and the farmers who trade with it.
Small-scale cocoa farmers are so removed from the final product that many of them have never seen chocolate, let alone tasted it. Consequently, when cocoa prices tumble, cocoa farmers’ income may fall dramatically while chocolate manufacturers and consumers may not even notice the price difference. And that leaves trade on the crop at relatively stable position.