For Ivory Coast, the world’s leading exporter of cocoa beans, the 2016-17 harvest season was one to forget. It was marred by plunging global prices, mass defaults by exporters that critics say the government should have prevented, and a surge in smuggling to neighboring Ghana. Ivory Coast, in West Africa, accounts for about 40 percent of the world’s cocoa supply. With a new cocoa season starting, amid forecasts of another global surplus, authorities there are under pressure to show they can do better.
1. How do Ivory Coast beans get from trees to my candy bar?
An estimated 800,000 farmers grow cocoa in Ivory Coast, mostly on small fields concentrated in the south. They hand-pick multicolored pods and break them open to extract cocoa beans, which are fermented, dried and sold at a government-set rate to local buyers. Those middlemen sell some cocoa to processors in Ivory Coast, but most of the beans are purchased by exporters, who ship them overseas, bound for processing factories that will then sell cocoa products to chocolatiers like Nestle SA.
2. What role does the government play?
The industry regulator, Le Conseil du Cafe-Cacao (CCC), arranges forward-sales agreements on behalf of the farmers for most of the crop even before the season starts. Based on those agreements, it sets a guaranteed price that is paid to farmers. The current system, which includes so-called stabilization funds for use when international prices fall, has been in place since 2012 when the sector was reformed to end years of mismanagement and reduce the impact of price swings.
3. What went wrong last season?
4. Who got hurt?
The crisis forced the regulator to tap stabilization funds and cost Ivory Coast more than $500 million in support payments to exporters. Ivory Coast cut its farmer price by a third for the smaller harvest that runs from April to September, squeezing farmers in a country where about a quarter of the population depend on cocoa for an income. The price slump has also reduced government spending.
5. Who was to blame?
Part of the problem was the exporters who bought Ivory Coast cocoa contracts while betting on higher prices and failing to hedge their risk. However, the CCC could have done more to monitor the system and check that exporters had locked in prices with their overseas customers. The regulator was also criticized for responding too slowly to the crisis when the market was looking for answers. And though the government pledged in 2012 to make the system more transparent, that hasn’t really happened.
6. What caused the boom in smuggling?
When Ivory Coast cut its farmer price for the smaller crop, Ghana kept its own price steady. That resulted in a surge in trade across the border, which is expected to continue. The illicit trade means Ghana is paying higher prices for some of its neighbor’s cocoa, while Ivory Coast misses out on taxes for the lost beans. Ivory Coast President Alassane Ouattara has proposed that the two countries narrow the gap between them. But Ghana is determined to hold steady. Both countries have said they’re increasing border security.
7. What’s Ivory Coast doing to avoid a repeat?
Ouattara has promised more rigorous management of the cocoa sector. The head of the CCC has been replaced, and the regulator is tightening rules and controls for exporters and their customers this season, as well as reducing the number of export licenses. For the bigger main crop that has just started, Ivory Coast has kept the guaranteed farmer price more than a third below what it was a year ago. The lower price will help the CCC bolster its finances after the default crisis dried out reserves from its stabilization funds.