On 12 June the two countries, which together produce about 65% of the world’s cocoa, agreed a price floor of $2,600 per tonne of cocoa produced. Then in August, Ghana said that it will increase cocoa prices paid to farmers by 5.2%, the first increase in four years.
An increase in global prices to US$2,500/tonne in early July “reflects the immediate market reaction more than a genuine belief that the authorities have the ability to implement this agreement,” according to Nathan Hayes, Africa analyst at the Economist Intelligence Unit (EIU) in London.
Historically, cocoa producers have been unable to set global prices, with buyers and processors controlling the market. Previous efforts to introduce minimum sale prices have failed on the back of weak cross-country collaboration, Hayes says.
- It’s “very unclear” how the authorities in the two countries will implement the higher prices which will require buy-in from purchasers, he says.
- It would difficult for Côte d’Ivoire and Ghana to withhold beans from the market for any length of time since cold storage and warehouse facilities are insufficient, Hayes argues.
- The EIU believes that an agreement to fix a minimum price of US$2,600/tonne for 2020/21 crop sales will be difficult to implement.
Cross border smuggling
There will be elections in both Ghana and Côte d’Ivoire in 2020, and the two governments will be keen to boost economic activity and export revenues ahead of the polls.
Sayina Riman, the vice president of the World Cocoa Producers Organization, said in June that the price floor lacks the support of other producing nations and was taken without consulting them.
- “There is a strong political motivation to sustain high prices,” Hayes says.
- Domestic prices in Côte d’Ivoire have often been lower than in neighbouring Ghana. This creates an incentive for smuggling across the border, thereby artificially lowering Côte d’Ivoire’s export receipts.
- The issue will continue to weigh on relations between the two countries, dampening the potential for increased cooperation, Hayes says.
Globally, the EIU expects cocoa prices to average US$2,323/tonne in 2019, before falling to US$2,248/tonne in 2020. Even if Côte d’Ivoire and Ghana do manage to introduce the price floor – which is not the EIU’s baseline forecast – then production would be stimulated in the medium term, leading to even more significant oversupply of the global market and price distortions, Hayes argues.
That point is confirmed by research from Aidenvironment and Sustainable Food Lab in 2018, which argued that high cocoa farm gate prices in 2015/2016 in the two countries stimulated high production levels in 2017.
- Many other lighter mechanisms exist that have the potential to reduce volatility and improve farmer returns, the Aidenvironment research says.
- These include market information systems, quality standards, agribusiness finance, trade licenses, better management of crop diversification and hedging strategies to reduce risk, according to the research.
Bottom Line: A lighter touch would be less politically visible than a price floor, but could help producers more in the long term.
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