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Ghana: Falling cocoa prices prompt joint action from Côte d’Ivoire and Ghana

2017/08/01

Côte d’Ivoire and Ghana have agreed to set up a joint cocoa body aimed at improving cooperation for a key revenue-earner that has been heavily impacted by a sustained drop in world prices.

Announced in June, the Ghana-Côte d'Ivoire Sustainable Cocoa Initiative (SCI) will see the neighbouring nations collaborate on policies to raise production and competitiveness. Other topical issues, such as cross-border smuggling – which can distort both farm gate earnings and crop quality – will as well be addressed.

The body will be led by a group of representatives from Côte d’Ivoire’s Coffee and Cocoa Council (Conseil du Café-Cacao, CCC) and the Ghana Cocoa Board, with separate committees focusing on key areas of interest, inclunding economics, marketing and production.

Traditionally competitors, Côte d’Ivoire and Ghana rank initial and second, respectively, on the inventory of world cocoa producers; the former produces 40% of the world’s cocoa – around 1.6m tonnes last year, according to the Central Bank of West African States – while Ghana contributes roughly 20%.

Pillar of the economy

The move comes at a critical juncture for what is a major revenue earner for both economies. Cocoa is Côte d’Ivoire’s primary export by price, bringing in CFA2.9trn (€4.4bn) last year, while Ghana’s outbound sales totalled €2bn in 2016, representing 22% of all export earnings.

However, in the 16-month period preceding the announcement of the SCI, the two producers saw prices for the crop fall from $3200 per tonne at the end of 2015 to around $1800 in early May – the lowest in almost a decade. This prompted the Ivorian government to slash its national budget by 9% in mid-May to CFA6.44trn (€9.8bn).

While cocoa prices inched up to almost $2100 per tonne towards the end of May, they again trended downward to $1800 per tonne at the beginning of this month.

The decline in prices is in part a result of slowing consumption increase, along with a jump in world production, leading to a glut in supply.

According to International Cocoa Organisation (ICCO) estimates, world production for the current agricultural season will hit 4.69m tonnes, creating a surplus of 720,000 tonnes. By comparison, production last year registered a deficit of 198,000 tonnes.

Côte d’Ivoire’s output alone is expected to reach 1.9m tonnes at the end of the agricultural season in September, up from 1.7m last year.

Ripple effects

The negative impact of the low-price environment on farming revenue has been compounded by a forward sales system that was introduced in 2012 with the aim of protecting producers from price fluctuations.

Dependent on buyers’ ability to hedge their purchases, the system worked well while prices were high, but is proving problematic in the current environment. Speculative auctions by small-scale traders before the drop-off in prices left some players unable to fulfil their contracts, and several defaulted as a result.

In a move to help shore up farm gate price amid falling commodity prices, the CCC dipped into its cocoa stabilisation fund in March, though the all spent and the remaining balance in the account were not specified by officials.

Estimates suggest around 80% of cocoa buyers failed to meet their contracts for crops in 2016, which left a significant all of production stranded and producers unpaid.

Faced with lower prices, the government suspended the forward sale auction system for the 2017/18 season in November, before reintroducing it at the end of May.

According to national data, Côte d’Ivoire forward sold 950,000 tonnes of cocoa for the 2017/18 harvest, equivalent to half of national production and 20% of world production, priced at around $2040 per tonne. The CCC is said to have plans to sell a further 1.2m tonnes of cocoa beans by September.

Paired with fears of damaging weather conditions for crops, inclunding civil unrest that disrupted supply chains, news that a large chunk of worldwide production had been sold forward saw cocoa futures for July rise by as much as 6.6% in one day in late May, closing at $2034 a tonne on the ICE Futures US exchange, representing the major one-day increase for the commodity since 2012.

Fulfilling potential

In the meantime, some stakeholders see additional efficient farming practices as being key to the health of the cocoa industry and agriculture sector as a whole. “Côte d’Ivoire’s cocoa yield of 350 kg per ha is much lower than other producers such as Ecuador or Indonesia, where the ratio stands at around 1-1.5 tonnes per ha,” Benjamin Bessi, director general at French chocolate-maker Cémoi, told OBG. “The initial step to increasing yields is supporting farmers in the pursuit of good agricultural practices, while as well providing financial assistance,” he said.

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