By Bernhard Tröster, Felix Maile, Cornelia Staritz and Sophie van Huellen
In 2021, Ghana and Côte d’Ivoire introduced a $400/tonnes Living Income Differential (LID) on cocoa bean exports, widely regarded as a key mechanism to improve the livelihoods of cocoa farmers. However, this premium was dwarfed by recent price surges at the global derivative markets, which serve as a benchmark for the sales of West African cocoa beans. Yet, farmers have seen a relatively minor increase in the price they receive.
With a tripling in prices since 2022, discussions about supply security and rising chocolate prices have taken the centre stage in the international news, at the expense of the previous debates on the LID and farmers’ livelihoods. This shift in focus has largely left aside questions about the distributional consequences for cocoa farmers and the unsustainable nature of the world cocoa price system, which is linked to increasingly financialised derivative markets in which price booms (and busts) become accelerated and therefore intensify instability and uncertainty for farmers.
An unprecedented price hike
World cocoa prices, determined on major commodity derivative markets in New York and London, have skyrocketed in recent months. As of August 2024, the latest ICCO-reported average price between London and New York was 45% higher than in January 2024 and 200% above August 2022 levels. At its peak, New York cocoa futures reached over $11,000 per tonne in April 2024, a drastic rise from just $2,200 in mid-2022.
Concerns about low supplies from West Africa due to poor weather conditions and diseases arose in 2022 and unfolded in the season 2022/23. This led to a record inflow of speculative positions at the New York futures markets and a doubling of prices in 2023. In early 2024, production estimates in Ghana almost halved, resulting in an explosion of price volatility and the exit of many market participants, leaving only high-risk-seeking actors and hedgers.
Lead firms in the cocoa global value chain, such as grinder-traders (firms that buy cocoa beans from exporters, grind them and sell processed cocoa), and chocolate manufacturers remained in the much shallower cocoa derivative markets as hedgers. These actors engage in derivative markets trading to hedge their physical cocoa exposure but also to trade speculatively for their benefit or on behalf of clients. Their blurring and interacting roles with financial actors in derivative markets have reinforced large price movements and volatility.
Higher farm gate prices, but high enough?
In contrast to liberalised market systems, Côte d’Ivoire and Ghana set minimum farmgate prices before the harvest season, aiming to stabilise prices and guarantee farmers a minimum of 60% and 70% of sales prices, respectively. Both systems are based on forward sales of several harvest months ahead of the harvest season, which allows the respective cocoa regulators to guarantee farm gate prices for the season.
In response to rising global prices, Côte d’Ivoire and Ghana were able to increase farm gate prices. For the new season 2024/25 starting in October, Côte d’Ivoire announced a farm gate price in the local currency of CFA 1.800 per kilogram (or $3.060 per tonne), up from CFA 900 in 2022/23. In Ghana, the 2024/25 farm gate prices increased fourfold in local currency compared to 2022/23 to Ghanaian Cedi 48.000 (or $3,070 per tonne), which however needs to be put in contexts of the strong depreciation of its local currency against the US Dollar.
These price increases come significantly short of the $11,000 per tonne reached at cocoa derivative markets in April 2024. The forward sales systems mean that cocoa export and farm gate prices for the season starting in October are roughly equivalent to futures prices between April and September the same year, plus the LID and a country premium. Both countries can take advantage of rising prices after the forward-selling period through spot sales during the harvest season. However, the ability to do so depends on the volume of cocoa not already committed through forward sales, which the majority of volumes normally already sold forward.
Over the last two seasons, export prices, and thereby farm gate prices, have remained significantly lower than futures prices on derivative markets during the forward selling period. While the precise volumes sold forward and the prices achieved are unknown, forward sales prices achievable in the build-up to the 2024/25 season were around $5.000 and therefore significantly lower than the futures prices during the harvest period that ranged between $7.000 and $11.000. Therefore, the forward selling systems limit both countries’ flexibility to adapt the timing of sales and hence cannot fully benefit from price increases in a rising market.
This price risk is further compounded with quantity risk. For instance, the shortfall in exportable volumes from Ghana is being exacerbated by widespread smuggling to neighbouring countries, which offer more favourable prices either because they are liberalised cocoa markets or, for the case of Ghana, also because farm gate prices have been eroded by a depreciating domestic currency. As a result, some contracts had to be rolled over into the next season and settled at the agreed prices from the previous seasons, pushing down export prices and, consequently, farm gate prices.
Although the price surges in 2024 were unprecedented in size, the benefits accruing to farmers and the governments of Ghana and Côte d’Ivoire have been marginal. Who then has benefitted?
Who benefits?
In other cocoa producer countries that have liberalised systems such as Nigeria, Cameroon and Togo, the global cocoa (futures) prices are channelled more directly to farmers. While farmers have no certainty about the season prices and hence are directly affected by price volatility, they benefit in the case of price hikes as currently. Reports have stated farm gate prices of around $7,000 per tonne in the first quarter of 2024, but it is still unclear how much the farmers have actually received last season, given that the main selling period for cocoa beans typically occurs between November and February and therefore potentially before the large price hike in February 2024.
Despite concerns about the higher cocoa prices squeezing profits for grinder-traders and chocolate manufacturers, there is evidence that these lead firms in the cocoa global value chain have in fact profited. Companies like Hershey’s and Mondelez were able to raise product prices considering price developments at the derivative markets, even though they secured a large part of their total supplies from Côte d’Ivoire and Ghana at relatively depressed prices.
In the first six months of 2024, Hershey’s and Mondelez expanded their gross margin – which reflects the profitability on their input costs – from 45 to 47% and from 38 to 43% on a year-to-year basis. Grinder-traders, such as Barry Callebaut, also published strong quarterly earnings. This is despite reports of some of these companies being locked into loss making short positions that were placed for hedging purposes and needing more working capital to conduct their hedging operations on derivative markets.
An unequal distribution of value
The current price hikes are exacerbating the unequal distribution of value across the supply chain, with grinder-traders and chocolate manufacturers capturing more of the value and reaping the benefits of high price volatility while farmers in the largest producer countries see limited gains. This situation has increased the strain on the stabilisation systems in Côte d’Ivoire and Ghana, which are designed to protect farmers from downside price risks but are not equipped to deal with the type of market volatility seen recently. Thus, the ability to manage price risks in the cocoa sector remains highly biased toward the large transnational companies and their use of financial hedging in turbulent conditions in physical and financial cocoa markets.
Even though countries with liberalized systems received higher farm gate prices in recent high-price seasons, the overall exposure to price changes and related instability comes with massive downsides for farmers, the sector and overall economic development in producer countries. Despite the initial difficulties in the two largest cocoa producer countries Côte d’Ivoire and Ghana, producer-coordinated price systems could be an alternative if they become broader in scope including cocoa producers in West Africa as well as Asia and Latin America.
A broad cooperation would improve the bargaining position of producer countries and allow for implementing the LID worldwide. This could also form the basis of establishing minimum export prices, including clauses to benefit from price hikes, and even – at least partly – decoupling price-setting from volatile and financialised derivative markets. Achieving greater flexibility in timing sales to lock-in favourable prices in a rising market is another important step for producer countries. Greater control over a larger part of sales prices (through the LID) and being able to time the part of the sales price that cannot be controlled (futures) would already be an important step forward, leading to higher and more stable prices as the basis for a living income for smallholder farmers.
Bernhard Tröster is Senior Researcher at the Austrian Foundation for Development Research (ÖFSE), Vienna.
Felix Maile is Doctoral Researcher at the Department of Development Studies, University of Vienna.
Cornelia Staritz is Associate Professor in Development Economics at the Department of Development Studies, University of Vienna.
Sophie van Huellen is a Senior Lecturer in Development Economics at the Global Development Institute, University of Manchester, UK.
Note: This article gives the views of the author, not the position of the EADI Debating Development Blog or the European Association of Development Research and Training Institutes.
Image: Cocoa farmers during harvest under a creative commons licence on Wikimedia