Edward George, Ecobank : Cocoa prices need step changes in thinking
West Africa produces 70% of world cocoa with record crops these past two seasons, even if outturn is estimated to have dropped by 6.6% in the current 2017/18 crop year, with Côte d’Ivoire expected to produce 1.9 million tonnes (Mt) and Ghana 800,000 t, says Edward George, Head of Ecobank Group Research.
International prices have lost around one third of their value since their peak in mid-2016, leaving Côte d’Ivoire and Ghana with seriously misaligned fixed prices. The Conseil du café cacao (CCC) in Côte d’Ivoire was the first to act in April 2017 for the 2016/17 mid-crop and reduce the fixed price to the producer from FCFA 1,000 to FCFA 700 perkilo, a level that was kept for the 2017/18 crop, starting October 1st 2017. As for Cocobod in Ghana, it left its fixed price at 7,600 cedis a tonne. However, bearing in mind the 12% inflation rate in Ghana and the depreciation of the cedi, there was a reduction in cocoa prices in real terms.
For CommodAfrica, Edward George gives his analysis on reforms in the sector in both countries and how price mechanisms can evolve and countries grasp a better share of the final product’s price. One must bear in mind that Ecobank finances about 20% of the cocoa and the value chain in West Africa.
How is reform going in the cocoa sector in Côte d’Ivoire and Ghana and what is the impact on farmer’s price ?
One thing is clear: the Conseil du café cacao (CCC) in Côte d’Ivoire and Cocobod in Ghana have substantially improved farmer revenues. The fixed prices have been generous and have been enforced at the farmgate. Farmers have also improved bean quality because they know they will get more money for their cocoa.
But the problem, of course, is sustainability. Côte d’Ivoire reduced prices early and Ghana was slower to respond, leaving it until the start of the 2017/18 season. This year, the CCC has been stricter with the licensing of exporters, but there is still unhappiness over the export tax (DUS) and the barème which is based on shipping costs. As for Cocobod, investigations into fraud and mismanagement are underway and these have prevented some programmes from being rolled out. Cocobod is also undergoing a comprehensive review of inputs policy and this could lead to important changes on how it leads the sector. Instead of having a monopoly on the provision of planting material, inputs & distribution, Cocobod could outsource parts of the value chain. This could be quite positive for improving efficiency and reducing the financing burden on Cocobod.
But there is a real question mark over the viability of the domestic grinding sector. Very low volumes of cocoa and chocolate products are consumed in Africa. Therefore, to develop grinding there, you need incentives. And how you structure these incentives is the problem. Currently in Ghana almost the entire subsidy to the grinding sector comes from discounting between 5% and 8 % of the light crop beans. But the light crop is getting smaller and smaller in Ghana every season because the main crop is getting better and better. So technically, the subsidy is disappearing.
To have some control on prices following the Abidjan Declaration last April, Côte d’Ivoire and Ghana are looking into storing beans. What is your analysis on this?
It will be a major challenge to pull this off successfully. If one looks at previous attempts to establish cocoa stocks in West Africa, there was Nigeria which tried in the early 2000s to set up a cocoa exchange. The problem there was not setting up contracts, nor liquidity. The problem was that when you bought a contract, you did not know if the beans were actually there in the warehouse, of the right quality, size, etc.
If you want to store cocoa in strategic stocks, you don’t store it in a tropical country. Because you will always have issues with the level of humidity, mould, pest infestation. Moreover, there is the cost of electricity, the sophistication of value chains, etc. It just does not make sense. If you are going to store cocoa for a long time, it’s best to choose a cold country (e.g. Estonia, Netherlands, the UK).
@La Mandarine. Bertrand Boissimon
But Côte d’Ivoire and Ghana could have warehouses in Estonia or elsewhere where it is cold, just like large companies have ?
I am sure -I hope- they consider it. But I suspect their vision of strategic stocks involves the cocoa being physically in their own country. They need to have a much more open approach to this, especially because the demand is not in Africa. The demand for cocoa is in Western Europe and North America. So this is where it needs to be stored. And when the market needs it, you release it.
Could Côte d’Ivoire and Ghana go further in their use of future markets ?
Let’s look at how things are working now. In Côte d’Ivoire, anyone who has a licence can buy cocoa beans. But if you want to export, you need to go to the futures auction and get a contract conferring on you the right to export a certain volume of beans during a certain period of the harvest. That is where there was a problem last season when several junior players reneged on their contracts after misjudging the market and prices moved against them.
As for Ghana, they don’t have a future export contract auction, but the entire cocoa value chain is tied to the international futures market. Cocobod has always adopted a more traditional, almost socialistic, model : the body controls the entire value chain. Every bean of Ghanaian cocoa is owned by Cocobod from the moment it is sold -and it has to be sold to Cocobod- to the moment it is exported. So even if you are a grinder, when you grind the beans in Ghana the cocoa still belongs to the Cocobod. In contrast, the CCC is more of an overseer and the cocoa value chain is more privatized and fragmented.
As for hedging in the futures market, Cocobod has its marketing arm, the Cocoa Marketing Company (CMC), which uses hedges like any other actor from the value chain, in particular players like Cargill, Olam & Barry Callebaut. As for Cocobod, it relies on its annual Pre-Export Finance (PXF) facility, which gives it the funds it needs to finance cocoa purchases during the season. As for the CCC, it is regulator so has no direct need to hedge.
Ultimately, are future markets the right place for cacao’s price to be determined as it is so strategic for thousands of people who depend on it to live? Is there another way of thinking for trading cocoa?
I would say no because the whole point of future markets is to deliver efficiency, price discovery and pricing risk. It does allow speculation, but this is essential as speculators provide liquidity. And often the market gets it right, ahead of time.
But in terms of how you manage the right incentives for farmers and grinders, that is a different question. I think both Cocobod and the CCC have got it about right for the farmers at the moment: the fixed price regime is working as far as I can see. But for grinders, the subsidy model is sub-optimal. The reality is that every processing sector in the world has some form of subsidy: protection against other imports, tax breaks, etc. You’ve got to put the right kind of incentive in place so you don’t create a failed business. And if you are not consuming the cocoa products in Africa, then you must have a subsidy for the grinders, otherwise why would they grind there?
Would there be sense for Côte d’Ivoire and Ghana to take shares in companies like Barry Callebaut, Nestlé, etc. to capture some of this value added to the bean?
Absolutely ! This is something I have suggested before to the leading trading houses and offtakers. If they are working with a cooperative why not, at the end of each year, give them a number of shares in your company? Because if all of the value is at the end of the chain, where the consumption occurs, then farmers should try to get a share of the profit there. It is only logical.
It’s a good idea, a bit outside the envelope, because we need to give farmers a bigger piece of the chocolate bar: currently, out of an 18-piece bar, farmers get around 2 pieces. Today most of the cost of a chocolate bar comes from research & development, marketing, because it’s a very competitive market and most consumption is in Western Europe and North America. The reality is that we are not going to create a major market for chocolate bars for Africans. So if we want them to get a few more pieces of the bar, we need to take them from the end of the value chain.
Côte d’Ivoire and Ghana seem to be considering it...
Well, they should get on with it. In the past there have been issues about ownership, legacy entities but also pride. West Africa wants to be seen as standing on its own feet, controlling the cocoa industry and therefore wanting to produce its own chocolate, grind its own beans, etc. But maybe we need to be more pragmatic and recognize that if Africans don’t consume chocolate, let’s get a piece of the profit where the consumption actually occurs.
How many years do you think it will take to see West Africa actually eating chocolate ? Programs are being developed for children in school to consume chocolate...
In Ghana and Côte d’Ivoire, many kids eat chocolate spread on bread or toast in the morning, some drink chocolate milk, it can be quite common.
But there needs to be a step-change with a focus on developing new products for African tastes. For example, milk chocolate melts in tropical climates. Fine, forget it then! But with cocoa beans, you can make soups, spicy soups, biscuits, cakes, whatever fits African eating habits. How many African grandmothers living in their village have a great local recipe that no one knows about? Because if the cocoa product fits the actual eating habits of Africans, they will start consuming it. My view is stop focusing on chocolate and do something entirely different. Cocoa can even be pushed as a health food because the fat in cocoa beans is known as being healthier than other kinds of fats like palm oil.
If Africans start consuming more of the cocoa they produce, they will exert market power. Look at Ethiopia and coffee: it is the largest producer of coffee in Africa, high quality, but it is not the largest exporter because the country consumes 40% to 50% of its own coffee. One can imagine Côte d’Ivoire saying: we are consuming around 300 000 t of cocoa, so you can only export this much. This is about exerting market power, not just taking any price offered.
Should Côte d’Ivoire and Ghana be afraid of other producers rising, in Latin America for example?
Well, I am keeping a close eye on what is happening in Ecuador and Peru. The whole plantation model is fascinating. If Latin America can produce volumes and reach yields of 1.5 or 2 t/ha, West Africa will lose its advantage as a mass producer of raw beans. And that could affect the whole model of cocoa production in the region.