Lovers of chocolate: brace yourselves. The price of your favourite confectionery could rise as Ivory Coast and Ghana, the west African countries that account for almost two-thirds of the world’s cocoa, join forces to push up prices.

Inspired by Opec, the oil producers’ cartel, the two nations announced this month a fixed price premium of $400 a tonne over the benchmark cocoa futures price, for every contract sold by either country for the 2020/21 season.

Mahamudu Bawumia, Ghana’s vice-president, told a recent cocoa industry gathering that he was enthusiastic about creating what he called a “Copec” to champion the interest of cocoa-producing countries and to alleviate the dire poverty of cocoa farmers.

“Price stability will mean farmers can more easily plan a loan and increase their production,” said Daan de Wit at IDH of the Netherlands, which co-ordinates public and private partnerships in agricultural projects.

But getting the market to digest this will not be easy. Cocoa futures have crept up, rising 5 per cent in London to £1,876 ($2,352) a tonne and 4 per cent in New York to $2,497 since the countries announced their concerted effort in June. That muted market response reflects uncertainty over the viability of the new pricing structure, say analysts, as well as fears over the impact on future supplies and demand.

Although it is the first time that the Ivorian and Ghanaian governments have co-operated in cocoa, the market is littered with attempts by producing countries to control supply flows and shore up prices, which have only exacerbated the rollercoaster price moves. “Intervention in the market doesn’t work,” said Jean-Francois Lambert, a former commodities banker and consultant.

READ  Dispose of Christmas present packaging carefully or you could be targeted by thieves, experts warn

The two countries may achieve their aim of selling at higher prices in the short term. But analysts note that over the medium term, higher prices in commodity markets typically depress demand.

“The implications are quite clear: higher prices for consumers,” said Jonathan Parkman, head of agricultural commodities at Marex Spectron, a UK-based broker. In the past, he added, consumption of chocolate has fallen sharply when the cocoa price touched $3,000 a tonne.

On the supply side, meanwhile, higher cocoa prices should stimulate production both in the two countries and other producers around the world. Similar dynamics played out in the oil market, for example, where a prolonged period of $100-a-barrel crude led to the US shale revolution.

Many analysts foresee big surpluses as a result, which is likely to weigh on prices. “There is no place to [store] that cocoa,” said Carlos Mera, analyst at Rabobank.

Large processors, traders and chocolate companies including Cargill, Olam, Barry Callebaut and Mars have been publicly supportive on the two countries’ move. Many big companies involved in the supply chain have sustainability programmes in the two nations while processors have built plants to boost domestic industries.

Francesca Kleemans, a director in Cargill’s cocoa business, said the Minneapolis-based company respected the governments’ decision but would “need to wait for further details . . . to understand what the technical implementation will look like and to understand the impact on the cocoa sector”.

Traders expect that the new pricing regime will take several months to shake out as forward selling by the two countries for the 2020-21 crop does not start in earnest until the autumn. Also uncertain is how the new system will affect the industry’s ongoing efforts to prevent child labour and deforestation.

READ  Par Technology files for $100M mixes shelf offering

For now, cocoa traders see a “phoney war” between buyers, who are waiting to see what the impact of the new pricing system will be, and the two countries, which might struggle to find buyers at the stipulated level of the futures price plus the premium.

Mr Parkman said: “A proper stand-off doesn’t begin . . . until September and October.”

Providing growers with a bigger share of proceeds from chocolate sales has been at the centre of debate among development specialists and NGOs for years, says Jacques Morisset, World Bank programme leader for the Ivory Coast. He notes that cocoa-producing countries have traditionally captured about 12-13 per cent of the industry’s $100bn-plus global value chain.

The two countries said this month they would legislate for a minimum producer price for farmers, and if prices rose beyond a certain level, they would put money into a stabilisation fund to dip into if the market crashes.

Leonard Mbulle-Nziege, analyst at Africa Risk Consultancy, notes that both Ivory Coast and Ghana have general elections next year — so shoring up support among hundreds of thousands of cocoa farmers at this point could make a lot of sense.

“There are political motivations behind their moves,” he said.



READ SOURCE

WHAT YOUR THOUGHTS

Please enter your comment!
Please enter your name here