Sweet reputation: Preserving quality is a priority for the cocoa industry

Cocoa is big business in Ghana. The country is the world’s second-largest cocoa producer, occasionally beating its neighbour, Côte d’Ivoire, for the top spot on the international market. Ghana’s cocoa product is widely considered top quality. Cultivated in six of the country’s 10 regions, more Ghanaians are reliant on the production of cocoa for their livelihoods than any other product or service.

The harvest in 2011 reached a record 1m tonnes, and due to the civil unrest in neighbouring Côte d’Ivoire as a result of a controversial presidential election, Ghana was the world’s largest producer. While the potential for medium-term expansion is sizeable, 2012 has been shaping up to be far less lucrative, with signs of an underwhelming harvest in early returns.

MAKING A DISTINCTION: Cocoa stands out in the country’s agricultural sector for several reasons. Unlike other domestically cultivated products, Ghana has created a centralised and regulated market for its beans, with a state agency in charge of buying from farmers and selling internationally. It is also unique in that it specifically benefits from being produced on small farms, with an average size of about 3 acres.

For agricultural activities other than cocoa, Ghana is encouraging large-scale farming in hopes that foreign investment can spur leaps in output and help foster a larger economy in value-added activities such as agribusinesses and basic processing activities. However, the government believes the nature of its small-scale operations contributes to the fact that Ghanaian cocoa is considered a premium product compared to other countries’ beans.

TWO HARVESTS: Ghana’s main cocoa harvest is in the spring, with a secondary collection at the end of summer. While production in 2011 reached 1m tonnes thanks to favourable conditions, a drier growing season in 2012 has meant that the 950,000-tonne target is not likely to be met, according to the Ghana Cocoa Board (COCOBOD). As of May 2012, the harvest had reached a volume of 744,298 tonnes, down 6.7% from the same period in 2011. Ghana’s output will likely be the second-largest in 2012, accounting for slightly more than a fifth of the global total.

Cocoa is Ghana’s second-largest export behind gold, accounting for just less than 20% of the total of goods sold abroad. Export earnings rose from $819m in 2005 to $1.42bn in 2009, according to central bank data. In addition to raw beans, cocoa exports include chocolate, cocoa powder, cocoa butter, cocoa liquor, cocoa cake and cocoa waste. Export destinations are most commonly the US and Europe for the semi-finished products, but for chocolates and other finished cocoa products, they usually go elsewhere in Africa, such as Morocco, Nigeria and Cote d’Ivoire.

As the authority over almost all cocoa-related matters for the country, COCOBOD is responsible for setting prices, selling to the international market and overseeing sector policy. The organisation was created in 1947, alongside the Cocoa Research Institute of Ghana, the Seed Production Unit and the Cocoa Swollen Shoot Virus Disease Control Unit.

SUPPLY CHAIN: Playing an intermediary role are the 26 cocoa merchants that are licensed by COCOBOD to buy directly from farmers and sell to the board. Prices are set on an annual basis by a price-setting board that is part of COCOBOD. The number is set in October for the following two harvests. For 2012 prices were set at GHS205 ($122) per 64-kilo bag, implying a total of GHS3280 ($1945) per tonne. COCOBOD public affairs manager Noah Kwesi Amenyah said he expected prices to rise in 2013 when set in October 2012, in part because Ghanaians are preparing to vote for president and parliamentarians in December 2012 and lowering the price in an election year would be unpopular.

By law, the price set must be a minimum of 70% of the freight on board price. The rest is split between COCOBOD and the merchants, who generally get between 4% and 8%, said Nana Amo Adade Boamah, managing director of Cocoa Merchants Company. Farmers are free to sell to their choice of marketer, and these companies compete for the sales with offerings to farmers such as financing, gifts and small-scale services. They are then responsible for transporting the crop to storage facilities throughout the country, at which point COCOBOD takes custody.

CAPTURED VALUE: As of 2012 about 70% of cocoa output is exported unprocessed. Companies that process the remaining 30% of raw output include local Ghanaian firms along with major international names such as Barry Callebaut, the world’s largest chocolate marketing company, and diversified agribusiness multinationals such as Cargill and Archer Daniels Midland. The latter two are relatively recent entrants to the market, and competition has increased in the past several years since their introduction.

Ghana’s light crop, the result of its minor harvest, is generally reserved for domestic processing, with the higher-quality beans sent overseas raw. Ghana has attracted major names to the sector thanks to price subsidies, which help ensure the sustainability of local processing. Processors are concerned that the subsidies on light crop may be changed or eliminated. Energy costs have increased in recent years, and energy unit prices in Ghana are now much higher than Côte d’Ivoire or Europe. The opportunity cost of removing, or even reducing, the light crop subsidy will threaten the sustainability of cocoa processing in Ghana. Foreign processors hope that a study under way by PwC will show that they are a positive influence in Ghana because they create jobs for local communities, and consider the subsidies necessary for them to continue in that role.

THE PRICE IS RIGHT: Pricing and subsidy levels are an area of concern, as setting them too high or low can cause distortions. The 2012 set price of GHS3280 ($1945) per tonne was considered low, causing speculation in local media reports that as much as 10% of the actual harvest was smuggled to Cote d’Ivoire, where prices are not regulated and farmers believed they could get a higher price.

In 2011, however, unrest in Côte d’Ivoire after President Laurent Gbagbo refused to relinquish power for five months after he lost an election might have led to producers there smuggling cocoa into Ghana for resale, which could have helped create last year’s record harvest. Prices on world commodity markets have generally remained between $2000 and $2400 per tonne in 2012, coming down from highs close to $3800 in early 2011, when traders were concerned about disruptions to supply due to the problems in Côte d’Ivoire. Prices could rise again in 2013 if harvests are low and supply is depressed, possibly due to drier conditions in Ghana that could spread to other major cocoa countries nearby, including Côte D’Ivoire, Nigeria and Cameroon.

REPUTATION MATTERS: There are concerns that beans smuggled from Côte D’Ivoire could get mixed with Ghanaian beans and affect the product quality for which Ghana is so highly renowned. As a result, COCOBOD officials have been working with law enforcement agencies to increase monitoring and limit corruption at border posts. Still, while preserving Ghana’s brand reputation is among COCOBOD’s main priorities, the organisation is also concerned about several trends that must be reversed to ensure the long-term health of the sector.

For example, small farms are better suited for fermentation and drying cocoa beans. Once harvested, beans are removed from the fruit of the cocoa tree and allowed to ferment, and then are left in piles with direct exposure to sunlight for drying.

The important variable at that stage is the size of the piles, Amenyah said. Piles too large result in uneven drying – beans in the middle of the pile can “cook” in the sun, leaving the beans’ moisture levels inconsistent – as seen on large farms.

As a result, cocoa processors much prefer the evenly dried beans of smaller farms compared to those that come from industrial producers. “You need to break the harvest samples into optimal sizes,” Amenyah told OBG. “Small-scale farming has given us the ability to do that and get the best quality.”

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The Report: Ghana 2012

Agriculture chapter from The Report: Ghana 2012

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