Cocoa Prices Turn Bitter in Ivory Coast

Background

Cocoa’s popularity can be traced as far back as 1900 BC, although domestication did not occur until centuries later in Mesoamerica. The cocoa tree (Theobroma cacao) thrived in the tropical region where the Olmec and later the Mayan civilizations also flourished. While cocoa domestication likely even predates the Olmecs, the Mayans turned it into an artform. Mayan hot chocolate was thick with a foamy head and mixed with spices.

The arrival of the Spanish in the Americas in the 1500s led to chocolate’s global dissemination. Spain had a monopoly on chocolate for a century before Italian production opened the market to the rest of Europe. Spain, France, England, and Holland all introduced cocoa plantations to hospitable colonies throughout the 1600s and 1700s. By the end of the 1700s, cocoa was being grown in present-day Ecuador, the Dominican Republic, Brazil, Jamaica, Martinique, and Grenada. Cocoa production continued to be ramped up to meet soaring demand. After success on islands off of Africa’s west coast, cocoa reached Ghana in 1876.

Tetteh Quarshie, a Ghanaian agriculturalist, successfully planted the first cocoa plants in mainland West Africa, helping to serve an ever-increasing demand for chocolate. As a cash crop, cocoa caught on among smallholder farmers because trees were intercropped with food crops thus avoiding competition for valuable real estate.

Mass production, including new machines used to grind and process cocoa, and the introduction of milk chocolate in the 19th century made the confection available and appealing to even more people. Ghana became the world’s largest cocoa producer and exported approximately 40,000 tonnes of the valuable commodity in 1891.

Ghana remained the top cocoa producer until Ivory Coast’s independence from France in 1959. Production quickly surpassed that of Ghana, Nigeria, and Brazil after forest reserves were opened up to farming in the country. Ivory Coast produced 1.4 million tonnes of cocoa beans in 2014, almost double that of second-place Ghana.

The taste for chocolate was not without humanitarian consequences. Slave labor was used in the vast majority of plantations, especially on the islands of São Tomé and Principe. Even after William Cadbury confirmed earlier reports of slavery, harsh conditions, and death in 1901, slave-produced chocolate was not banned until 1909. Even today, child and forced labor continue to be crises without ends in sight.

Production to meet steady global consumption is a high-stakes balancing act. The recent price fluctuations highlight how even a good situation can quickly melt away.

Recent price turmoil

Poor weather in the 2015/16 marketing year (October to September) reduced global cocoa supply. As expected, lower production in Ivory Coast and Ghana led to a spike in prices for the first half of 2016.

Ivory Coast bet big on a continued slump following another weak harvest. Cocoa exporters bid on contracts before any real trends could be established in the October-March harvest season. These orders were used to set a minimum farm gate price by the Conseil Cafe Cacao (CCC), the regulatory body for cocoa and coffee in Ivory Coast. The price was set at 1100 CFA francs per kilogram for the 2016-17 marketing year in October 2016, just as the harvest was set to begin.

Speculation on a market as opaque as cocoa includes inherent risks, which may lead to big losses. The traders thought another poor harvest was just around the corner and bet prices would rise. Therefore, a combination of good weather and slumping cocoa demand could spell trouble for Ivory Coast. Increased rainfall began with the October-March harvest in West Africa, which was good news for farmers hoping for a better season.

There was also a lack of demand in Europe. The common measure for cocoa demand, grindings, stagnated. Possible causes for the downturn include worries over Brexit, a hot summer, and recent wellness trends. By the time farmers were ready to sell, the prices that wholesalers were willing to pay were already lower than Ivory Coast’s set farm gate price.

Exporters and producers could not purchase cocoa at the price set by the CCC if they wanted to make a profit. Trucks laden with cocoa sat at ports for months due to a lack of buyers. Of the purchases that were completed, several were rejected because of rotten beans. Ivory Coast’s miscalculation is a costly one for the country. Cocoa beans, paste, and butter account for 40.2 percent of Ivory Coast’s exports by value. Ivory Coast will review its 2017 budget because of the drop in sales and, just last week, asked for additional funds from the International Monetary Fund.

Ghana recently reduced its projections, however, which may mean the end of rock-bottom cocoa prices. In fact, prices have increased in recent weeks. The speed with which the cocoa situation escalated highlights several shortcomings in the sector’s global value chain. Perhaps what’s most frustrating are the myriad solutions to these problems which can be easily implemented.

Imbalances in the system

Speculation that led to overpriced cocoa could have been partially avoided. Of course, the surprise of Brexit created sharp currency volatility. After the vote, the British pound tanked and London futures soared. Nevertheless, there were early signs that cocoa production might be much better than anticipated by the market.

Precipitation in the beginning of September was already on pace to be above average for the season. That trend continued into October. Despite better rainfall totals year-over-year, traders bet on the continued rise of cocoa prices. Once the minimum farm gate price was set, there was no way to adjust once it was clear that prices would decline. With cocoa prices lower than Ivory Coast’s minimum price, many buyers opted to ignore their contracts to the detriment of the farmer.

A mandatory gate price minimum helps support smallholder farmer livelihoods, but it can be costly when prices are not aligned with the market. The same policy that helped farmers the year prior led to no sales this year.

Proper storage systems are also missing in the cocoa industry. Without any buyers, cocoa rotted in trucks. Grain farmers account for moisture levels, aeration, temperature, and insects in silos for long-term storage. Warehousing or proper storage to hold onto the crop and wait until prices rose would soften any sales slump associated with a miscalculated minimum gate price.

One major reason farming bears the brunt of any failure is the heavy imbalance in the cocoa value chain. All the steps leading up to cocoa processing are dwarfed by the value of marketing and retail. Cocoa farming accounts for 6.6 percent of the value chain while trading makes up 6.3 percent of that chain. Grinding, the first step of processing, is just 7.6 percent of the value chain. Meanwhile, manufacturing and retail make up 35.2 percent and 44.2 percent, respectively.

Manufacturing and retail occurs outside of the cocoa farming countries, which adds another layer of imbalance. Ivory Coast and Ghana, combined, account for 50 percent of global cocoa production, but process just 15 percent of the global cocoa grindings. Cocoa beans, at 29 percent, are the largest source of export earnings for Ivory Coast. For Ghana, cocoa is the second-largest source, accounting for 19 percent of export earnings for the country.

With cocoa farming representing such a small fraction of the full value chain, major chocolate confectioners have no incentive to improve the situation. The bottom lines of companies are unaffected—or nominally affected—by changes in cocoa prices. While confectioners shrug, smallholder cocoa farmers could be going bankrupt.

More importantly, the government should develop a transparent, legally enforceable trading system. Currently there are no real incentives for buyers to honor contracts struck at unprofitable price levels. A better solution may be found in the development of infrastructure that supports farmers or provides better access to lines of credit for buyers.

Conclusion

Cocoa traders speculating on the continued rise of cocoa prices in mid-2016 were proven wrong after a bumper crop in West Africa saw production quantity jump by double digits. Traders in Ivory Coast were already locked into trade agreements requiring them to purchase, if they chose to, well above the current market price. Antiquated rules that were supposed to help farmers led to a disaster for them, and a serious inconvenience for many others.

Cocoa, like coffee, is one of a handful of agricultural commodities grown exclusively in tropical regions and consumed overwhelmingly in Europe and North America. Cocoa, however, is more extreme than coffee in how lopsided its value chain is, funneling only a small fraction of its final retail value back to farmers. The continued presence of quasi-governmental organizations like Ivory Coast’s CCC likely causes much of this dysfunction by adding a superfluous layer between the world market and the farmers who trade with it.

Smallholder cocoa farmers are so removed from the final product that many of them have never seen chocolate, let alone tasted it. Consequently, when cocoa prices tumble, cocoa farmers’ income may fall dramatically while chocolate manufacturers and consumers may not even notice the price difference.