West African cocoa price disparity unhealthy for ending market volatilityThis article is powered by The Public Ledger
Leading cocoa producers Ivory Coast and Ghana are far from having a significant influence in their attempts to push up global prices.
In fact, the disparity in the producer prices the two countries have put forward, could make their goals for tackling the volatility of prices more difficult to achieve.
The negative effects of price volatility, as well as unfavourable political and economic occurrences, may combine to make it harder for Ivory Coast and Ghana to end the global cocoa price volatility. These factors could also hinder efforts to influence and ultimately dictate the prices of cocoa in the international market.
Since the two West African countries agreed to take a common position to stop the fall of cocoa prices in May 2017, there has been no significant increase in the prices of the commodity.
The international price of cocoa is currently USD2,149 per tonne. This is a little above the USD1,900 at which the crop sold in April 2017, after falling from a high of over USD3,200 in mid-June 2016. This 40% decrease was largely due to bumper harvests and an oversupply of beans to the world market, especially from Ivory Coast.
The oversupply is in its second consecutive year, leaving cocoa prices at their current low levels. Prices may dip even lower unless a major and unexpected event happens in any of the two largest cocoa producing countries, which have fixed different producer prices for the 2017/18 season.
Fixing cocoa producer prices
Ghana has fixed its farmer producer price at GHS7,600/tonne (USD1,689). This is the same price it paid farmers last year in spite of falling international prices of cocoa.
On the other hand, Ivory Coast sells its anticipated crop forward and uses the average sale price to fix its guaranteed price for farmers. The country – the biggest cocoa producer – reduced the price it pays farmers by 36% to CFA700 per kilo (USD1.260/tonne). The country previously paid its farmers CFA1,100/kg.
Bruno Kone, Ivory Coast's information minister said the government in Abidjan will continue to adjust the producer prices to farmers according to international prices of cocoa.
"Ivory Coast government has a responsible approach and when you have a responsible approach, you can hardly afford to buy higher than what you sell," Bloomberg quoted him as saying. "This said, everyone does as they please."
Though the Ivorian government requested Ghana should reduce its producer price to close the gap of around USD429 per tonne between the producer prices of the two countries, Ghana's government refused to do so. This was owed to the campaign promises it made during the December 2016 general elections won by the New Patriotic Party (NPP) under President Nana Addo Dankwa Akufo-Addo.
The major promises included:
- Increased producer prices plus bonuses high enough to encourage farmers to produce more cocoa for export
- Confirmation that the value farmers receive for their produce is not diluted by depreciation of the GHS currency against the US dollar
- Strengthened and expanded local processing
- An intensified search for new markets for the country's processed cocoa products
- Reactivation and expansion of the mass spraying of cocoa farms
- Replantation of old cocoa farms with high-yielding and disease resistant plants
- Facilitation of access to farmlands for youth in cocoa-producing areas.
However, the incumbent Ghanaian government has not helped farmers in the movement and depreciation of the GHS currency against the US dollar as it had previously promised. The GHS stood at GHS4.5 to the US dollar on November 14, 2017 from the previous day's GHS4.46 close – down 6% since January 2017, according to Reuters data. The GHS plunged to an all-time low in March 2017, when it traded at GHS4.7 to the US dollar.
"Reducing the producer price of cocoa in Ghana is a politically sensitive issue," said Julius Odukoya from the Cocoa Association of Nigeria. "Thousands of Ghanaian families rely on cocoa for their livelihood, toying with cocoa prices could end in the government losing an election."
Odukoya said Ghana, in spite of the GHS currency depreciation, should be able to sustain the GHS7,600 per tonne price for farmers following its success in securing a USD1.3 billion syndicated loan from international banks to finance cocoa purchases in the 2017/18 season. However, this was lower than the USD1.8 billion loan obtained the previous season.
Negative effects of price disparity
Ivory Coast's Coffee and Cocoa Council (CCC) and Ghana's Cocobod have pledged to deepen collaboration and coordinate their production strategies to tackle the cocoa price volatility. Nevertheless, the disparity in the producer prices between them may make it harder for the two countries to work harmoniously to raise global cocoa prices.
In September 2017, as a first step in efforts to push up world cocoa prices, Ghana and Ivory Coast announced a plan to create a buffer stock of cocoa beans. This will exert more influence over world prices, whilst also increasing the domestic use of cocoa through local processing and consumption.
Pricing of cocoa in the two countries is a major test in the effort to end price volatility on the world market. However, the two countries' global cocoa price initiative is already failing this test due to the huge disparity (USD429 per tonne) in the prices of cocoa in both countries. Ghana's producer price is more than 30% higher than Ivory Coast's valuation.
Since the prices were not aligned or made uniform – one country's cocoa beans are commanding higher prices in the other country – smuggling and distortion in output figures are two negative outcomes.
When Ivory Coast's cocoa is smuggled into Ghana, the latter ends up paying higher prices for some of its neighbour's cocoa. Additionally, Ivory Coast will not collect taxes for the beans smuggled out of its territory. This results in a big loss of revenues for Ivory Coast, which had been forced to cut its 2017 budget by 10% due to the fall in the international prices of cocoa.
"It should be noted that the huge funds needed by Ghana and Ivory Coast to support the efforts to end price volatility and raise world market prices of cocoa, are not yet available..."
Also, smuggling creates security problems and corruption at the border. Some of the funds that should go to social and economic developments in both countries are channeled towards fighting smuggling and curbing corruption.
Lambert Kouassi, chairman of the CCC, corroborated this assertion when he disclosed that Ivory Coast has provided security forces with 15 additional vehicles to increase surveillance of border areas and reduce cocoa smuggling.
It is difficult to gauge the quantity of cocoa that could be smuggled from Ivory Coast to Ghana in the current season because the two countries do not give official statistics or estimates on cross-border smuggling. Cocoa officials claim around 70,000-120,000 tonnes of Ivorian cocoa may end up illegally in Ghana.
Another negative effect of price disparity is that Ivorian cocoa farmers could be unhappy and turn to other crops in a country where about a 75% of the population depend on cocoa for income. This may discourage the production of more cocoa by Ivorian farmers, whose efforts yielded a record two million tonnes of cocoa in the 2016/17 season – higher than the 950,000 tonnes produced by Ghana for the same season.
In addition, the frustration and helplessness of Ivory Coast government and cocoa officials over the price disparity and smuggling may dampen the zeal of the Ivorians to drive the well-publicized plan by both countries to end price volatility.
"It should be noted that the huge funds needed by Ghana and Ivory Coast to support the efforts to end price volatility and raise world market prices of cocoa, are not yet available," said Toyin Ibikunle, an agricultural economist.
The African Development Bank (AfDB) has confirmed it has received a request for a USD1.2 billion loan from Ghana and Ivory Coast to be used for projects related to the determination of the international prices of cocoa.
Both countries are not particularly strong financially, as they have loan agreements with the International Monetary Fund (IMF) in addition to the loan support expected from the AfDB.
Ghana is running a three-year USD918 million loan deal with the IMF. It was entered into in 2015 by the previous government to shore up its economy after the fall of the prices of some of its major commodities such as cocoa, gold and oil and losing around 30% of government revenues in external debt payments each year.
In December 2016, the IMF approved two three-year arrangements for Ivory Coast for a combined total of about USD658 million to support the country's economic reform programme.
Oil concession dispute settled
Ghana, which is more politically stable with high investor confidence, also produces oil. It should be able to replace revenue losses from cocoa exports, as oil prices are now gradually rising in the international market. Ghana has won its oil dispute case against Ivory Coast.
The International Tribunal of the Law of the Sea in Hamburg, Germany, delivered its judgment in the case on September 23, 2017. This validated Ghana's claim that active oil wells and on-going exploration activities in the Jubilee, Sankofa and 10 oil fields fall within the territorial waters of Ghana, which produces more oil than Ivory Coast.
In May this year, Ivory Coast witnessed a mutiny by soldiers that halted businesses in several Ivorian cities and stopped cocoa export for some days. The government paid large sums to the soldiers to bring the mutiny to an end and this further negatively impacted its revenue base. Trouble could break out again between the soldiers and the government signaling further political instability in Ivory Coast – a massive turn-off for investors.
Ivory Coast could in the new year also see more unrest from its farmers. This year, farmers were not paid for weeks for their cocoa by buying companies. These firms had expected cocoa prices to keep rising but instead they fell sharply in mid-June 2016, leading to huge financial losses to them.