{"id":4797,"date":"2021-01-24T15:39:17","date_gmt":"2021-01-24T15:39:17","guid":{"rendered":"http:\/\/commodityconversations.com\/wordpress2\/?p=4797"},"modified":"2022-05-10T19:23:46","modified_gmt":"2022-05-10T19:23:46","slug":"cocoa-economics","status":"publish","type":"post","link":"https:\/\/commodityconversations.com\/wordpress2\/2021\/01\/24\/cocoa-economics\/","title":{"rendered":"Cocoa economics"},"content":{"rendered":"

Cocoa farmers in Ivory Coast went on strike last week in protest against the low prices they are currently being offered for their crop. They have also threatened to block port warehouses where more than 100,000 tonnes of cocoa have backed up due to a lack of demand. A farmers\u2019 representative told <\/span>Bloomberg<\/a> that farmers are only being paid 800 CFA francs per kilo against the state-guaranteed minimum price of 1,000 CFA francs, roughly $1.85\/kg.<\/span><\/p>\n

Covid19 is partly to blame for the lack of demand. The FT<\/a> (subscription required) reports that the virus has disrupted \u2018sales of chocolate at airports, hotels, restaurants and speciality boutiques’. As a result, world cocoa demand fell 2-3 per cent last year, prompting processors and chocolate manufacturers to delay shipments on quantities that they have already bought, and hold off on new purchases. This drop in demand has hit the Ivory Coast particularly hard. Together with Ghana, the country produces 60 per cent of the world\u2019s cocoa.<\/p>\n

Ghana and Ivory Coast work together more closely than in the past, setting similar ex-farm prices and reducing smuggling across their borders. In 2019, they looked at ways to increase farmers\u2019 incomes and discussed setting a minimum export price. They eventually rejected the idea and instead introduced a \u2018Living Income Differential\u2019 (LID), a $400 per tonne premium that buyers had to pay over the world price, starting with the 2020\/21 season.<\/p>\n

The $400 per tonne LID was not just a premium over the futures; it was also in addition to the country differentials.<\/p>\n

Country differentials (premia and discounts relative to the futures) fluctuate widely; they often depend on the cocoa that the market expects to be delivered against the futures. Processors prefer new crop cocoa to old crop, and the futures can be depressed, for example, if old crop is expected to be delivered.\u00a0 For the 19\/20 season, exporters probably paid an average premium of about \u00a375 for Ivory Coast and \u00a3125 for Ghana, as these purchases were made starting in September\/October 2018.<\/p>\n

The larger cocoa processors \u2013 particularly the ones with factories in Ivory Coast – have paid LID on their 2020\/21 purchases, but they have had difficulty passing it on to their buyers. Unlike Fairtrade or the Rainforest Alliance, LID doesn\u2019t come with a certificate that can be handed on to the chocolate manufacturers. Without a certificate, manufacturers can\u2019t put a label on their retail packaging, nor ask their customers to pay more.<\/p>\n

Rather than pay LID, Hershey was reported last month to have taken delivery\u00a0from the December futures contract<\/a>: a mixture of the old crop cocoa from West African, Ecuador and Sulawesi.<\/p>\n

In response, Ivory Coast and Ghana launched an unprecedented media campaign against Hershey. They also threatened to suspend the company\u2019s sustainability programmes in the two countries. It is not clear what arrangement Hershey made with Ivory Coast and Ghana, but it has been reported<\/a> that Hershey has agreed to pay the Living Income Differential. Still, as Hershey does not buy directly from the Ivory Coast, it is unclear how that works.<\/p>\n

It is also unclear how Ghana and the Ivory Coast expected LID to work in the first place.<\/p>\n

By asking their customers to pay $400 per tonne more for Ghanaian or Ivory Coast than for other cocoa, chocolate manufacturers had a strong incentive to buy alternative origins. Ghana and Ivory Coast have tried to stop this by putting media – and local – pressure on the big chocolate companies. Still, the big companies account for less than half of the world\u2019s chocolate production and an even smaller percentage of beans.<\/p>\n

The cocoa market is looking at a surplus this year of up to 300,000 tonnes. Because of LID, this surplus is now primarily made up of cocoa from Ivory Coast and Ghana. At this time of the year, the Ivory Coast would have customarily sold all of this crop, most of their mid-crop and a significant chunk of the following main crop. Instead, they still have an estimated 500,000 tonnes to sell from the 2020\/21 season and a similar quantity from the 2021\/22 crop. They have not sold anything yet for 2022\/23.<\/p>\n

Cocoa is what is known as a \u2018front-loading\u2019 commodity. The harvest runs from October through March, with shipments concentrated during this period; processors then store the cocoa and use it throughout the year. With storage costs at around \u00a312 per month, it is not surprising that buyers have been delaying purchases, aggravating the build-up at the origin. Time is on the side of the buyers; they can afford to wait.<\/p>\n

The inevitable has happened: both Ghana and Ivory Coast have reduced prices to tempt buyers. Country differentials have fallen to a discount of \u00a3150 \u2013 200 per tonne. Unfortunately, they have little success even at those prices; buyers have either already bought elsewhere or are waiting for prices to fall even further.<\/p>\n

But isn\u2019t this just bad luck on the part of Ghana and Ivory Coast? Wouldn\u2019t LID have worked if the balance sheet had been in deficit rather than surplus? Unfortunately, the answer to both questions is \u2018no\u2019.<\/p>\n

If there had been a deficit, the outright cocoa price would indeed have risen. Unfortunately, neither Ghana nor Ivory Coast would have been able to sell if they had continued to ask for a premium of $400 per tonne over the market. The world price could have gone to the moon, but they would still have asked for $400 per tonne more. To move their crop, the country differentials would have been reduced \u2013 probably to levels similar to where they are today. As with all farmers, it is the outright price that matters, not the differentials.<\/p>\n

So, what is to be done? With hindsight, the obvious answer would have been to go with the two countries’ original idea and set a minimum price, not a differential. Even then, with a market in surplus, the world price would have fallen below the minimum price; Ivory Coast and Ghana still wouldn\u2019t have sold. The minimum price would have become a maximum price with the market only buying it when it was needed.<\/p>\n

It is sad to say, but cocoa economics are the same as everyone\u2019s else\u2019s economics: the only cure for low prices is low prices.<\/p>\n

\u00a9 Commodity Conversations \u00ae 2021<\/p>\n

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Cocoa farmers in Ivory Coast went on strike last week in protest against the low prices they are currently being offered for their crop. They have also threatened to block port warehouses where more than 100,000 tonnes of cocoa have backed up due to a lack of demand. A farmers\u2019 representative told Bloomberg that farmers … <\/p>\n

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