A senior London cocoa analyst has warned Côte d'Ivoire and Ghana that their joint initiative to introduce a minimum floor price for cocoa could lead to over production, price rises and a ‘structural surplus’ in the market.
The two West African countries are due to convene a 'Technical Committee' meeting in Abidjan on 3 July where they are expected to set a minimum price of $2,600 MT for its cocoa to allow farmers a decent living wage.
Current market prices are approximately $2,124/MT for cocoa beans. If agreed, the new price will be introduced for the October 2020-September 2021 crop, the marketing of which begins in autumn this year.
Short-term consequences
In his quarterly briefing at Marex Spectron’s London office, Jonathan Parkman, deputy head of agriculturals, said the short-term consequences mean that the cocoa processors and chocolate companies will have little choice but to pay whatever the two countries choose because they all have invested huge amounts of money in sustainability programs and are heavily committed to their operations in Ghana and Côte d'Ivoire. The can’t easily go elsewhere or shop around for cheaper cocoa, he said.
“It’s safe to say that the consuming side, the processors, are not appreciative of the proposed price minimum. In percentage terms it’s 10-15% above current price, which could lead to a short-term price rise of 10-15%,” Parkman said.
He said Ghana and Côte d'Ivoire produce two-thirds of the world’s cocoa, most of which attracts a price based on quality premium and is much sought after in the market and there has not been a surplus of West African cocoa in recent years.
Long-term consequences
Because of the planned price hike by the two countries, Parkman predicts that cocoa processors will ultimately be encouraged to invest in other countries, leading to a surplus of cocoa, which will need to be financed.
He said there is nothing wrong with setting a floor level, but factors such as other taxes and shipping costs need to be calculated, and while the move by Ghana and Côte d'Ivoire is ‘laudable’ it is the ‘wrong mechanism’ if it is going to overstimulate production, and therefore create a structural surplus in the market.
'Silly season'
Apart from the news from West Africa, Parkman said the sector is entering what he called the ‘silly season’ as July and August make it difficult to predict market prices because weather fluctuations can make massive differences.
Marex Spectron’s analysis on weather patterns is predicting that the cocoa-growing belt is entering a mini dry season and that crops in West Africa are ‘somewhere between OK and very good’ but the weather can have a disproportionate effect on the final outcome.
Parkman said that his quarterly analysis shows an increase in global cocoa production, with Côte d'Ivoire and Ecuador leading the charge. Côte d'Ivoire is roughly producing 100,000 tons a year more and the country will produce 2.2m tons of cocoa in total, out of a global production of 4.8m tons.
Ecuador is growing at the same scale but it’s a smaller country producing only 300-330,000 tons a year.
He said the 2% increase in demand is keeping pace with that of production, but the growth in cocoa demand is coming from emerging countries, such as South America, South Asia, India, and eastern Europe.