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Ecobank: “It’s unlikely we’re going to see a surge in cocoa prices”

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As the cocoa sector faces another surplus year, weak prices are expected to continue to be a feature of the market, with key African producers feeling the pressure.

IEG Vu senior analyst Sandra Boga spoke to Ecobank’s UK Head, Edward George, to see if Ghana is likely to alter its farm-gate price and if the bearish sentiment is here for the long-haul.

This interview took place on February 21.


Ecobank’s recent report stated that prices while still weak are rebounding slightly this year. Would you say it is a sign of an overall turn around, or did last year signal the start of a long period of weak pricing for cocoa that could last for several seasons?


We’re in a period of relatively weak prices I think you can say. It is very difficult to determine what an equilibrium price of cocoa is because it is such a niche and specific market. Its very much a luxury commodity which it goes into high end products. You’ve only got around 4.5 million tonnes of cocoa produced per year in the entire world. You compare that to grains which is hundreds of millions of tonnes. But you could say that a range of USD2,000-2,500 or GBP1,500-2,000 is a ‘normal’ price for cocoa. So, if you look back at what happened between 2015 and 2016 where the cocoa price sky-rocketed. By the middle of 2016 it was about GBP2,500 a tonne, which is insanely high. It then fell to around GBP1,400 by mid-2017; so since early 2017 it’s been in the range of GBP1,500-1,800. My view is that is probably the right balanced price for cocoa. The problem is, the market reacted to these very high prices in previous years so there was a huge amount of planting taking place, especially during the last price rise. So, all of that is coming into production now. It takes 2-3 years to reach full production of the trees. What we’re facing here is a very strong season. If we look at Ivory Coast, it is producing more or less the same as last year, which was already a record (2 mln tonnes). The same goes for Ghana; they’re having a good season. So, we are seeing a bit of pickup in demand. Certainly, if you look at the global economy, it is quite positive. You can see there is rising consumption, employment, purchasing power and this all bodes pretty well for cocoa. I think if anything we’ve got a bit of balance coming back to the market now. But I think it’s really unlikely we’re going to see a surge in prices. There’s just not enough demand on the other side. There’s plenty of production. I mean we’re still looking at another surplus, it might be small, but it’s still a surplus.


Do you think Ivory Coast or Ghana will adjust their Farm Prices again this year? There’s rumours of Ghana maybe adjusting theirs since they didn’t last year.
What I think you can say is that Ivory Coast grasped the nettle, because they saw that cocoa prices had fallen dramatically during the season. It’s often been the case in Ivory Coast they lower the fixed price for the mid-crop as it tends to be smaller beans of lower quality, so you can justify a lower price. What they did last season is they lowered their price for the mid-crop then when the main crop season started they effectively didn’t change the price and kept it lower. Basically, we had the reaction from the market that you would expect. That farmers aren’t investing heavily in cocoa as they might be as the prices aren’t as good. The problem is Ghana is that they took the decision, a political one, is that they needed to keep prices reasonably high. And then do bear in mind in Ghana they have higher inflation. But my own view is that they are going to struggle in Ghana to continue paying for the high fixed price for the entire season, mainly because international prices aren’t high enough. Effectively they have to subsidise the crop and I don’t think they want to do that. So certainly, the pressure is on Ghana and whether it can maintain this high fixed price when they go into the light crop, remains to be seen.
Has smuggling between the two countries increased as a result of the price difference?
There’s always smuggling between Ghana and Ivory Coast because the reality is that the two cocoa sectors border each other. So, for any farmer who is within a few miles of the border it is really just a matter of who is paying the best price. There’s always been a very large amount of flows of cocoa back and forth.   Where the problem is, is if there’s a huge price differential. So, if Ghana in real terms is paying 30% more for cocoa, then even if you’re on the other side of the country of Ivory Coast, you think ‘well its worth my while transporting the crop’. My understanding at the moment is that price differential is not so huge that we’re seeing a complete divergence of supplies, of where they would normally go to Ghana. But I think that any Ivorian who is cultivating cocoa on the border is probably going to sell it in Ghana because they are going to get a better price. There may be some in the other direction too as there is always flow between both.


Do you think the Ghana-Ivory Coast Cocoa Initiative, supported by The African Development Bank (which will aid both countries to have a say in cocoa price fixing), will be pulled off?
I think it’s a good idea that Ghana and Ivory Coast…and Cameroon and Nigeria for that matter, should all agree to develop their cocoa sectors. For the mutual interest of themselves and the African cocoa sector. Africa is producing over 70% of the world’s cocoa so it makes sense to exert market power. The difficulty with what they want to do is that they’re ultimately thinking about building buffer stocks in West Africa. For example, both Ghana and Ivory Coast want to hold supplies back for when prices are low and release them when there is a price surge, in order to keep the price more stable and also to exert some market power.   But in order to do this they need to be very effective at managing stocks. And what we’ve seen in the past is that if you want to actually store cocoa in tropical countries, you need the very best systems in the world that can manage quality and humidity etc, and that is a very difficult operation to run effectively. The moment anyone thinks that the cocoa they are buying might have been compromised in terms of quality, they immediately reduce the price. And that’s why you see so much cocoa that is directly handled by the trading houses and immediately given to the processors to turn into chocolate. Or you see a number of exchanges around the world which have huge amounts of cocoa. Whether its London or New York…or even Estonia! Estonia is a major place for storing cocoa. It’s cool, there’s no tropical diseases there, it’s also part of the EU which is quite an open economy in terms of regulation. In fact, Estonia is used a lot when exporting it to Russia. So overall the initiative to want to create buffer stocks in Africa is a good one and I think it is something that should be pursued, but I think it’s a huge challenging to effectively manage that. And we have an example of when this didn’t work in the past with Nigeria trying to set up a cocoa exchange. Around 15 years ago, where the big issues wasn’t the structure around contracts etc, it was the infrastructure of the actual cocoa warehouses. They issued contracts when people weren’t sure if the cocoa was actually there or the quality of it, so as soon as you have that, nobody will buy it. So all it comes down to the warehouses and how you control the flow of the cocoa and protect the quality that is the real technological challenge. If they can fix that - and there is no reason why they can’t - then yes, I think it can be a very good idea what they’re trying to do.


Part 2 of this interview, on Ivorian supplies, global demand and competition can be read here


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