Côte d’Ivoire’s grind hits a bump
The Ivorian government is pushing industry to process 50% of the country’s cocoa harvest, which is the largest in the world, but business leaders say that the grinding sector has already plateaued due to the removal of government incentives and a recent rise in prices paid to farmers.
Ever since President Alassane Ouattara’s government implemented reforms in 2012 that streamlined the sector and promoted a higher fixed price for farmers, cocoa grinders have been lobbying government to change the way the grinding sector is taxed.
Talks about the processing sector have been delayed and are expected to be completed in November. The grinding sector has been growing strongly over the past few years.
According to Jean-Marc Anga from the International Cocoa Organization, in the 2014/2015 cocoa season Côte d’Ivoire surpassed the Netherlands as the world’s top grinder, with an all-time high of 570,000tn. Although grinders are complaining about the profitability of the sector, companies have opened new plants this year.
In March, Singapore’s Olam, which purchased the global cocoa operations of US-based Archer Daniels Midland in December 2014, opened its second grinding plant, at the port of San Pedro, with a capacity to grind 75,000tn per year.
Investments such as these take a long time to plan, and Olam had committed to it before the cocoa sector reforms of 2012. The principal point of discord between the investors and the government relates to the main export levy, the Droit Unique de Sortie. Prior to 2012, processors paid taxes based on the weight of the processed cocoa products.
Under the new system, grinders have to pay taxes based on the weight of beans purchased. This has led to a 25% increase in the tax burden.
The government introduced the previous tax break in the 1990s to attract investors and boost local grinding operations. It was supposed to be in place for only five years to allow grinders to recoup their investment costs.
Now processors say they are treated the same as exporters that ship raw beans and do not have an incentive to grind their beans locally.
In early July, Ouattara’s government said it would reintroduce some form of tax incentive. Although it did not give details, the announcement pleased the processors. “It’s a positive move,” says Abbas Amer, director of operations of Choco Ivoire, the main Ivorian-owned cocoa factory, which is based in San Pedro. “This is what we were expecting, even if we are still waiting for more details.”
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Industry sources say that companies should not be too optimistic. A prominent industry source who asked for anonymity, explains: “The government is more flexible. It has accepted to grant another tax break, but it will be limited in time and only for newly installed facilities.” He says that the changes are unlikely to take effect until the 2016/2017 season.
Although government officials keep saying they want to process 50% of the country’s cocoa locally by 2020, up from 30% currently, analysts say it is not doing everything it could to reach that goal. Côte d’Ivoire is committed “to favour grinding over export of raw beans,” government spokesman Bruno Koné says.” Grinding locally gives us added value and creates jobs.”
The government says that it is focused on boosting added value in other agricultural fields, such as the cashew sector. Côte d’Ivoire is the world’s second-largest cashew nut producer with 625,000tn in the 2015 season. The rate of local processing is about 7%, with 41,012tn processed locally. The Conseil du Coton et de l’Anacarde has set an even more ambitious target of processing 35% of the cashew crop by 2020.
Analysts do not share the same point of view as the government about its commitment to processing. “There is not really a political will to process cocoa locally,” says Abidjan-based economist Souleymane Ouattara. “Cocoa factories are not job-creating units, and the market is not big enough.” Cocoa factories are indeed highly mechanised and firms are only making half-processed products – mainly cocoa liquor.
Research from pan-African lender Ecobank argues that the removal of the tax break has created an unfavourable environment and is now discouraging investments in the sector.
This situation may explain why the government is changing strategy. The bank says that the grinding sector has at least temporarily peaked and is expected to slump this season. It estimates grindings this harvest will only reach 500,000-540,000tn.
Production should not fall too much more, as grinders have long-term contracts with chocolatiers. They are complaining though that processing cocoa locally is becoming less profitable.
Grinders also face surging prices. The 2012 reforms set a guaranteed farmgate price for farmers. A set price, combined with an improved quality thanks to tougher rules and controls, have driven prices up. In the 2014/2015 season, the price was set at 850 CFA francs ($1.5)/kg, up from an average of 667 CFA francs just before the reform.
Margins are also thin for Ivorian grinders. The country is not cost competitive and the cocoa industry is not labour-intensive, which means that lower labour costs don’t offset higher production costs and a lack of local consumption.
Local grinders are in more trouble than the multinationals like Olam and Barry Callebaut. Most Ivorian companies launched their operations within the past 10 years, and they have not had time to pay off their investments.
Local company Choco Ivoire is now grinding about 30,000tn per year out of a total capacity of 100,000tn because of the tax regime, Amer tells The Africa Report. “If we have our advantages back, it will encourage us to grind more,” he adds. buy edibles online canada Smaller company Susco, which had been processing for French company Cémoi, has shut down its operations.
Victoria Crandall, a commodities analyst for Ecobank, explains: “[Cocoa grinding] creates some jobs, but not at the scale of a final product. The real money in the cocoa industry is in making chocolate: it’s in the distribution, the retail.”
There is little room for expansion in the grinding sector. “There is not a huge market for chocolate in Africa,” Crandall says. “While it is growing modestly, it is unlikely that consumption will surge in the short to medium term.” And it is unlikely to see many multinationals embarking in the steps that Cémoi took in opening a chocolate factory this May, she adds. The French company’s factory has the capacity to produce 10,000tn of chocolate, and the company says it is targeting the growing West African middle classes.
Demand, however, is taking off in Asia. Indonesia – the world’s third-largest cocoa grower – along with Malaysia and Singapore are becoming grinding hubs, based on rising demand for cocoa powder in China and India.
The increasing international competition could give the Ivorian government a reason to rethink how best to create an environment that encourages local production.
With firms holding back from developing expansion plans, the government will have to act soon if it wants to meet the 50% local processing target within the next five years.