Ghana’s Cocoa Industry “in need of a fillip”

It is time for Africans to set aside their disappointment that the African challenge, in the FIFA World Cup, was curtailed with none of the African teams qualifying for the quarter-final and look forward to making giant strides on the economic front. Hopes still persist for many African countries sitting on the back of a resource bonanza. One of the torch bearers of Africa’s hope is Ghana, one of the top-ten fastest growing economies in the world.

The economy of Ghana has a diverse and rich resource base with a primary manufacturing and exportation of resources such as hydrocarbons, industrial minerals among many others. Gold and cocoa production are major sources of foreign exchange while oil production is expected to boost economic growth further. In fact, sound macro-economic management (until the past two years), beside higher prices for crude oil, gold and cocoa, helped the nation sustain high GDP growth rates in the last few years. The country’s annual growth has consistently exceeded 6 percent GDP every year since 2000 and is projected to expand at a rate of 8.7 percent in 2014 – well ahead of the 5.4 percent average in the Sub-Saharan region. This advancement is going to be fuelled by robust trade performance of gold, crude oil and cocoa, which forecasters predict will be the driving force to achieve its goal of becoming a middle-income country by 2020.

Cocoa – A Key Economic Booster for West African Nations

The Ghanaian economy was severely tested last year due to a huge drop in gold and cocoa prices, as a result of which, the Bank of Ghana reported, the country lost US$ 1.2 billion.. Earnings from gold and cocoa exports dropped to US$5 billion and US$1.6 billion in 2013 from US$ 5.6 billion and US$ 2.2 billion respectively in 2012. Ghana is the world’s second largest cocoa producer, behind Ivory Coast. According to Cocoa Barometer 2012, West Africa is the source of more than 90 percent of cocoa consumed in Europe. Ivory Coast and Ghana alone contribute 59 percent of the global cocoa supply, with Indonesia, Nigeria and Cameroon accounting for another 23 percent.

The cocoa market has apparently entered a period of structural deficit amid weak production growth and double-digit percentage growth rates in demand for the commodity. Well-known chocolate makers including Mars and Switzerland’s Barry Callebaut have already warned of a 1 million ton supply deficit in 2020 if production is not increased. Growing demand for chocolate emanates especially from emerging economies like India, China and Russia. Euromonitor, a consumer research group, reported that over the past five years, India has seen sales more than double from 54,700 tonnes to 129,200 tonnes, while China’s rose by 41 percent to 192,500 tonnes. In Russia, the chocolate market is expected to grow by 45 percent over the next five years to reach US$ 11.6 billion. Economists purport that the appetite for chocolate will keep growing at a similar pace until at least 2020.

Cocoa Market – Challenges Galore and Ways to Tackle Them

In spite of increasing demand for African cocoa, African growers receive a meagre share of the revenue generated by global chocolate manufacturing companies. Furthermore, volatility of cocoa price poses a great challenge to the cocoa producing countries. It is high time concerned western African countries, especially Ghana and Ivory Coast, took measures to prevent the replication of Nigeria’s haphazard handling of its cocoa industry in the advent of the oil and gas discovery.

Mapping multi-year cropping pattern

Cocoa output in Ghana will probably touch 850,000 metric tonnes and is expected to exceed this season’s (2013-14 started October 2013) target due to “good” weather and an increase in plantings, according to the country’s industry regulator Ghana Cocoa Board (COCOBOD). The inability to understand global demand-supply signals leads to either a scarcity or glut in domestic production (refer figure 01).

Introduction of high tech methodology and the mass cocoa spraying, which has reduced the maturity period of the plantation to about three years is set to put downward pressure on the prices. Currently, by maintaining the producer price of cocoa for the crop season at the old price (GH₵ 3,392 a ton) in Ghana and minimum price of over US$ 1,500 aton to be paid for farmers in Ivory Coast, farmers to an extent are insulated from price risk due to any supply glut in the market. But price fluctuation due to uneven supplies is hugely impacting both private and public marketing agencies, exporters and international traders of cocoa in the two western African countries. There was an announcement of a bonus made to farmers in Ghana in the previous crop season – a bonus usually provided by farmers’ based cooperative Kuapa Kokoo, while there was no such announcement made in the current marketing season due to expectations of lesser realization for the produce in the global market. An effective way to address this is to outline a multi-year cropping pattern among the major producers of cocoa. A multi-year crop plan ensures that the quantum of the commodity that is supplied to the international market is well synchronised to minimize frequent fluctuation in price apart from maintaining a rational price for sustainable farming. A vibrant commodity market with a well-established futures market can facilitate an effective mapping of a multi-year cropping pattern by providing long-term price clues to the stakeholders of the ecosystem. Such a platform facilitates key policy makers to dilute their role in contentious price determination aspect and instead focus more on macro level issues of the industry such as efficient financing, enhancing yields, greater marketing effort and eliminating any infrastructure bottlenecks.

Efficient price discovery

Though cocoa price has gone up in 2014 from the lows of early 2013, there is still a high level of inconsistent pricing for the produce at the world market. This is partly due to traders weigh? rising deliveries in West Africa on one side and expectations of increasing consumption in the global market. This demand-supply mismatch in future can be estimated more accurately if there is a vibrant futures market as all the stakeholders would be able to make informed price decisions. An efficient futures market will ensure fair price discovery while also influencing the prices in the domestic spot markets to align with international prices. Existence of a pan African cocoa futures contract facilitates a certain level of standardization of the product among producing countries apart from fair price discovery, thus avoiding any excessive price anomalies in the market based on the origin of the product.

Strengthen supply chain and quality of the product

Creating an orderly, transparent and efficient marketing system is going to promote agricultural investments and enhance productivity. A well-established commodity exchange will not only facilitate efficient price discovery but also strengthen the agriculture ecosystem. An efficient trading platform boosts the right infrastructural facilities, warehousing and collateral management. Logistics support enables domestic producers to safeguard their yield from theft and diseases. A sustained coordinated effort to further increase the yield and establish an efficient marketing system by all members of the Alliance of Cocoa Producing Countries (COPAL^[1]), which account for 75 percent of total world cocoa production, would ensure they get the best price for the commodity in the world market henceforth.

Risk mitigation

Cocoa prices sometimes are highly volatile. Futures prices of cocoa on two benchmark exchanges – ICE and LIFFE – have indicated an annual price volatility of 25 percent while daily price volatility was 1.5 percent in the last three years (refer table 01). In 2010 – 2011, harvest season yields reached a new record level, and prices went up to more than US$ 3,700 per metric ton, on the back of political crisis in Ivory Coast. However, they went down to US$ 1,950 per metric ton at the end of the year 2011. Prices have moved in a tight range thereafter before continuing their north bound journey in 2014. This trend is depicted in Figure 2. A well-established futures market provides an opportunity for players in the industry to lock in their prices.

Falling Cedi promoting smuggling

Fluctuations in the US Dollar-Ghana Cedi foreign exchange (FX) rate impacts the formal supply chain of cocoa. FX rate fluctuation is also promoting cocoa smuggling between the world’s two biggest cocoa producers. Ghana’s cedi has fallen nearly 25 percent against the dollar so far this year, while Ivory Coast’s euro-pegged CFA franc more or less remained stable. As a result Ivory Coast’s official farmer price is higher than Ghana’s roughly by 25 percent. Currently, Ghana pays a fixed price to farmers of GH₵ 3,392 (US$ 1,100; fx rate US$ 1=GH₵ 3.01) a ton, while Ivorian farmers receive a minimum price of CFA 750 a kilogram (~US$ 1,500 a ton). Thus, the Ivorian price is more attractive to Ghanaian farmers, who can make bigger profits selling their output to smugglers. In fact, Ghana’s falling currency has fuelled smuggling of as much as 100,000 tonnes of cocoa into neighbouring Ivory Coast in the last three quarters, reversing a previous trend. Flourishing smuggling only adds woes to the effort of meaningful regulation of cocoa supply into the international market and thereby hampers rational price discovery, due to inadequate information and control on the supply front.

Conclusion

Cocoa exports are an essential part of the economy and crucial to the future economic transformation of these western African countries. Establishing a transparent trading platform would address many challenges of Cocoa exporting countries. A well regulated supply of cocoa would also ensure stable prices and reduce the stress on the existing infrastructure. Establishment of a pan African commodity exchange offering liquid cocoa futures contracts of varying maturity periods will position Africa as a Regional Hub for the commodity’s trading activities apart from ensuring efficient price discovery. Reviving the cocoa industry will undoubtedly have a transformative impact on the western African economy as a whole.

By Prasad Dalavai and Dharmeshsingh Mohadewo

* – The views expressed in this article are those of the authors and should not be construed or attributed to Bourse Africa or its subsidiaries.

[1] Originally established in 1962, COPAL’s members included Ghana, Nigeria, Brazil, Ivory Coast and Cameroon and currently the membership has increased to 10, with the new members being the Dominican Republic, Gabon, Malaysia, Sao Tome and Principe and also Togo.