Ghana, Ivory Coast and the new cocoa price floor stick

Via | The Africa Report

Ghana and Côte d’Ivoire, which together produce about 65% of the world’s cocoa but get only about $6bn each year from the $100bn global chocolate industry, are joining forces in a bid to exert greater pricing power.

On 12 June the two countries agreed a price floor of $2,600 per tonne of cocoa produced. The political rationale for the agreement is clear. Obafemi Oredein, a cocoa specialist in Nigeria, points out in IEG Vu’s Global Outlook for 2019 that the 40% fall in global cocoa prices in 2017 was a direct result of excess cocoa supply, especially by Côte d’Ivoire. Ghana’s President Nana Akufo-Addo in May promised producers that the government would not reduce amounts paid to them, despite falling world prices. Côte d’Ivoire’s President Alassane Ouattara needs higher cocoa prices as he prepares to seek reelection in 2020.

Making the agreement stick may be harder.

Judith Ganes, president of J. Ganes Consulting in New York, applauds the initiative, while cautioning that “attempts to regulate or control market forces typically end up failing, or even creating worse conditions over the long run. There is a long history of failed intervention in commodity markets, including cocoa, [where] price support schemes result in increased supply, lowered demand, and a bulge in stocks,” she says.

The Economist Intelligence Unit (EIU), in analysis published on 14 June, points out that the two governments have previously set price floors, both independently and in coordination. These were at much lower levels than the current one, yet the guaranteed prices later had to be cut in response to declines in global prices.

  • Setbacks in cooperation have also occurred because of rival efforts to attract investment into the countries’ respective cocoa sectors, the EIU says.
  • Halting cocoa exports for an extended period to enforce the price floor would reduce fiscal revenue and export earnings.
  • Producers are unlikely to be willing to hold out for long in the context of a price downturn, the EIU argues.
  • And if the governments seek to guarantee that cocoa producers will receive $2,600/tonne, their fiscal positions will come under pressure.

Global cocoa prices seem unlikely to provide any tailwind for the price floor. The EIU forecasts that cocoa prices will average $2,180/tonne in 2019, a 5% drop from the $2,300/tonne average in 2018.

Better storage is part of the solution. In 2018, the African Development Bank approved a $600m loan for Ghana’s cocoa regulator to build warehouses and stockpile cocoa to protect the sector against volatile prices.

Dutch banks also have their part to play.

  • The Netherlands is the world’s largest importer of cocoa and the second-largest cocoa grinder.
  • report commissioned for the Dutch Banking Sector Agreement (DBA) on International Responsible Business Conduct regarding Human Rights in 2018 argued that cocoa farmers in West Africa often fall victim to predatory loans, compounding existing human rights and child labour issues.

Dutch banks, the report argues, have little or limited direct presence in cocoa producing countries, but can do more to increase smallholder access to finance. Banks, the report says, need to use their leverage over retailers, manufacturers and traders to improve working conditions in the cocoa value chain.

Bottom line:

Ghana and the Côte d’Ivoire, even together, probably don’t have the bargaining power to weather a protracted cocoa price downturn. They will need help from leading importing countries such as the Netherlands if cocoa industry incomes and living conditions are to improve.

Via | The Africa Report

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