By Felix Maile, Bernhard Tröster, Cornelia Staritz and Jan Grumiller
Commodity price instability is a major challenge for commodity-dependent countries. This is also true for the major cocoa producer countries Côte d’Ivoire and Ghana, which account for two thirds of world’s cocoa production. As we argue in a recent article in the EJDR , the two West African countries can challenge the price-setting power of highly concentrated international buyers through their state-governed price-stabilization measures. However, export and producer price stabilization is limited to one season and entails great risks for the state due to intra-seasonal price volatility. Moreover, inter-seasonal price instability is not addressed and largely born by smallholder farmers, and export and producer prices remain linked to world prices set on futures markets in London and New York.
In 2018, Côte d’Ivoire and Ghana started a new joint attempt to increase cocoa export prices and ensure a living income for farmers through the ‘Abidjan Declaration’. While their initial announcement of a common ‘floor price’ for cocoa exports independent from futures prices was rejected by international buyers, both countries announced a ‘Living Income Differential’ (LID) of USD 400 per tonne on top of cocoa futures prices and quality premiums for the season 2020/21 and promised farmers a minimum price of USD 1,820 per tonne.
Now, ahead of the third LID season, many actors in both countries are disillusioned. Already in April 2021, Côte d’Ivoire cut guaranteed producer prices for the mid-season by 25% and fixed producer prices for the season 2021/22 below the targeted USD 1,820 per tonne. Ghana kept producer prices stable in nominal terms in both seasons by means of of subsidies, but high inflation still reduced the real value. Who is to blame for these difficulties: the COVID-19 pandemic, differences in national price stabilisation systems, or international buyers and their price-setting power?
One goal, two systems
Despite the intention of more cooperation, Côte d’Ivoire and Ghana run two distinct price stabilisation mechanisms. Both rely on forward export sales of around 80% of the harvest six months ahead of the harvest season to fix export and relatedly producer prices. While the Ivorian marketing board Conseil Café Cacao (CCC) uses an auction system where private exporters sell to international buyers, Ghana centralizes its export sales through the public Cocoa Board (COCOBOD). Both systems remain vulnerable to world price variations as the remaining 20% are exported based on spot futures prices during the harvest season. The cocoa price crisis in 2016/17 for instance forced Côte d’Ivoire to lower producer prices in the mid-season. Ghana’s system was more resilient, as COCOBOD could issue cocoa bonds to subsidize producer prices, which increased however its external debt.
With the breakout of the COVID-19 pandemic, cocoa world prices dropped by almost 20% in March 2020 and have remained between USD 2,200 and 2,800 per tonne since then. These prices plus quality premiums and the USD 400 LID would still be sufficient to achieve the minimum export price of USD 2,600 per tonne to pay farmers a minimum price of USA 1820 per tonne. However, international buyers stopped signing forward contracts due to demand and transport uncertainties in the context of the pandemic, which put the forward selling process in both countries under severe pressure. For instance, COCOBOD reported difficulties with getting an annual syndicated loan that is collateralized with forward sales and provides working capital to local traders in Ghana.
Shifting sourcing strategies by international buyers
In December 2020, tensions grew between the marketing boards and some major chocolate manufacturers, although they had initially agreed to or even explicitly welcomed the LID system in 2019. Hershey’s and Blommer were accused of sourcing unusually large volumes of physical cocoa on futures markets from other producer countries to avoid paying the LID. As a reaction, both countries threatened to cancel the sustainability programmes of the two companies, but backed off after a ‘final commitment to pay the LID’ by Hershey.
Also sourcing strategies of trader-grinders who source cocoa beans from producer countries and process them to cocoa liquor, powder and butter changed in 2020/21, prioritizing the use of their stocks instead of sourcing new beans form Côte d’Ivoire and Ghana. In North America, cocoa physically sourced through futures markets from other producer countries increased tenfold in the first months of 2021 compared to 2020. According to the International Cocoa Organization (ICCO), this indicates that grinders prefer to source their cocoa from non-LID origins. In Europe, stocks declined throughout the autumn and winter of 2021.
Lower country differentials undermine LID
The combination of reduced demand and shifting sourcing strategies put Côte d’Ivoire and Ghana in an unfavourable position. In January 2021, major difficulties to sell the cocoa harvest in Côte d’Ivoire were reported, suggesting that farmers were stuck with around 200.000 tonnes of beans (10% of annual production). Eventually, in April 2021, CCC announced to reduce the guaranteed producer price for the mid-season by 25% from VFAF 1000 per kg to CFAF 750 per kg – officially due to a decline in global demand.
A statement by different Ivorian civil society organizations suggests, however, that ‘behind the scenes, multinationals made the Ivorian government bend’, preferring ‘to slow down their purchases of cocoa and draw on their stock, to put pressure on prices’. In price negotiations, international buyers would reduce the country premiums formerly paid for the high quality of cocoa beans and even turn Ivorian differentials into discounts, which offset the LID premiums. As a result, Côte d’Ivoire could not reach the necessary export price levels to pay the LID in full in the first two seasons.
Link to futures markets and financialisation
As international buyers rejected the initial approach by Côte d’Ivoire and Ghana to introduce minimum export prices, the link between export and futures prices remains in the LID system. This indicates the price-setting power of ‘grinder-traders’ and the key role of financial hedging and other activities on futures markets in their business strategies. Hence, both countries remain to a large extent ‘global price-takers’ and carry the price risks of setting minimum producer prices. This is even more problematic as price volatility has increased together with increased short-termism and complexity on futures markets due to financialisation processes which include financial and speculative trading strategies by physical actors and an increased share of financial investors.
Expanding the LID?
The first seasons of the LID system revealed again the difficulties of the major cocoa producer countries to stabilise and increase revenues from cocoa exports and incomes for cocoa farmers. International buyers have reacted to changes in demand related to the pandemic, but also to the introduction of the LID. Even though the two top producer countries have power to demand forward sales from international buyers as a basis for stable producer prices within a season, they seem to have limited leverage in the current context to enforce the LID. International buyers changed their sourcing and pricing strategies, while ensuring that prices in all transactions are set based on futures prices, which is the basis for their physical and financial business strategies. Uneven (price-setting) power has been the reality for a long time in the cocoa sector, with financialisation dynamics and the Covid-19 pandemic accelerating these asymmetries.
Despite the limitations in implementing the ‘Abidjan Declaration’, it could be the basis for a broader regional cooperation including Nigeria and Cameroon as the other two important cocoa producers in West Africa. An expansion on a global scale could also include Asian and Latin American producer countries. Such a broad cooperation would improve the bargaining position of producer countries against international buyers and allow for implementing the LID ideally worldwide. More importantly, this could even establish minimum export prices and generally delink price-setting from volatile and financialised futures markets. Higher and more stable prices are the key basis for a living income for smallholder farmers as well as social and environmental standards in cocoa production. This is stipulated as a key objective in many international buyers’ CSR strategies, but not aligned with their current sourcing and price-setting strategies.
This blog entry is based on the article “Price-setting power in global value chains: The cases of price stabilisation in the cocoa sectors in Côte d’Ivoire and Ghana” by Cornelia Staritz, Bernhard Tröster, Jan Grumiller and Felix Maile in the European Journal of Development Research (EJDR).
Felix Maile is Doctoral Researcher at the Department of Development Studies, University of Vienna.
Bernhard Tröster is Researcher at the Austrian Foundation for Development Research (ÖFSE), Vienna.
Cornelia Staritz is Tenure Track Professor in Development Economics at the Department of Development Studies, University of Vienna.
Jan Grumiller is Researcher at the Austrian Foundation for Development Research (ÖFSE), Vienna.