Last Saturday, October 1st, marked the beginning of West Africa’s 2016/17 cocoa season. This is my fourth cocoa season observing from the sidelines, and I believe that it could be the most intriguing one yet.
While there is a lot to cover this season (including the Ivorian regulator’s dealing with fraudulent contracts and the Ivorian government’s ongoing expulsion of illegal cocoa farmers from protected forests), let’s take a look at fixed farmer prices in West Africa’s two largest producers, Côte d’Ivoire and Ghana.
The Ivorian government announced a hike in the fixed farmer price to XOF 1,100/kg, up 10% from the previous year.
This was surprising. Local industry players were unanimously certain that the Conseil de café et cacao (CCC), the regulator, would keep last year’s fixed farmgate price at XOF 1,000/kg since international cocoa prices are facing significant downward pressure this year.
They weren’t completely wrong – the CCC had advocated against a price increase.
According to this Reuters article, while the CCC proposed a price range of XOF 1,000-1,1000/kg to the government, it ultimately recommended against an increase, preferring to allocate the extra money to the reserve fund.
The CCC wanted to double the “rainy day” fund — which guarantees 60% of the international price to farmers even if the market collapses — to XOF 150bn, reflecting a conservative and prudent management on part of the regulator.
But, the Ivorian government didn’t take the CCC’s advice, opting for the modest hike. This won’t break the bank. The CCC can well afford it, having forward sold the 2016/17 crop when international cocoa prices were still buoyant.
What is worrying is that the Ivorian government is setting expectations among farmers that the price will increase every year despite market conditions. As cocoa farmers represent a huge political constituency, no one in governments wants to risk disappointing them.
However, this prioritizing of politics over sound financial management does not bode well for the long-term sustainability of Côte d’Ivoire’s stabilized system.
In Ghana, the government unveiled a fixed farmer price of GHS 7,600/MT, up 12% from last year.
The Deputy Finance Minister noted that it was higher than Côte d’Ivoire’s fixed price though the difference is slim at $30/MT.
Over the last three years, Ghana’s economy has been struggling with a weak currency and rampant inflation. These two factors have eroded Ghanaian cocoa farmers’ dollar-equivalent income, incentivizing them to sell across the border.
No doubt the Ghanaian government still winces thinking about the 2013/14 season when it lost up to 100,000 MT of cocoa to smuggling. Understandably, Ghana needs to be more aggressive in setting its fixed cocoa price, ensuring that it beats its western neighbor because otherwise farmers will sell to smugglers.
This year is also an election year in Ghana – and a hotly contested one at that. The incumbent party, the NDC, is facing a tight race from the opposition party, the NPP. Therefore, the government was widely expected to raise prices in a bid to woo cocoa farmers, which represent an enormous voting bloc.
When I told a Ghana-based cocoa trader that Cocobod was looking to raise prices by at least 10%, he was unequivocally dismissive, arguing that Ghana only had room for a 5% increase, if that.
After all, under IMF tutelage, Ghana needs to control election-related spending as government debt has skyrocketed from 36% in 2009 to 73% of GDP in 2015.
But, as it is an election year, politics take priority over finances.
This article was first published on At Origin.
Published:25 October 2016