Changing the forecast: While poor weather has slowed production, the tide may be changing in 2017

For more than two decades Côte d’Ivoire has been the world’s largest cocoa producer, recording a 20% production surge in 2014 to reach 1.7m tonnes, or 40% of the global supply. Cocoa and processed bean exports comprised 26% of total exports in 2013, or 34% if oil and gas are excluded, and account for 15% of annual GDP, according to a BBC report published in June 2016.

France’s Ministry of Agriculture, Agrifood and Forestry reported that over 800,000 farmworkers are employed by the industry, providing indirect support for 6m people, or a quarter of the population. Cocoa is cultivated across 2m ha of land, with most grown on smallholder plots ranging in size from 3-5 ha.

Recent Growth

Côte d’Ivoire’s cocoa production has slowly been recovering from the negative impact poor weather had on the country’s 2015/16 cocoa growing season. The 12% decrease in production, representing a deficit of 250,000 to 300,000 tonnes compared to the 2014/2015 period, has been largely attributed to the persistence of the El Niño weather phenomenon. The weather pattern brought some of the harshest winds the country has experienced in decades as well as longer periods of drought.

Such adverse weather conditions have seriously impacted the quality and the quantity of cocoa beans produced. For a sector responsible for as much as 22% of the country’s GDP and half of its exports, according to the World Bank, a poor production year translated into a failure to meet many export sales contracts — often negotiated up to a year in advance based on predictions and speculations — thus impacting one of the country’s most profitable sectors.

Indeed, in late January 2017 the country’s cocoa marketing board, the Coffee and Cocoa Council, reported it had begun cancelling cocoa contracts that were in default. The regulator made the decision after local Ivorian firms that had secured export permits at auction, with the expectation that prices would rise, were no longer able to afford to buy beans to fill their contracts. Prolonged periods of drought have impacted the quality of cocoa in Côte d’Ivoire. “The drought was longer than we expected. The decrease in water supply caused a decrease in the cocoa bean size, yielding less free fatty acid, more cellulose and more shell,” Jean-Ponce Assi, secretary-general of Société Africaine de Cacao, an Ivorian cocoa producer told OBG. The deficit of free fatty acid due to smaller beans impacted the quality of cocoa butter — a fundamental ingredient in chocolate — thus forcing many producers to purchase fatty acid supplements in a bid to limit the impact of poorer quality beans on chocolate.

Back To Normal

Heavy rainfall in September 2016 has given cocoa bean producers renewed hope for a better harvest in the coming production year. Reuters reported heavy rainfall in the centre-western region of Daloa — responsible for about a quarter of Côte d’Ivoire’s cocoa beans production — as well as in the eastern region of Abengourou, reputed throughout the country for its high-quality beans. Additionally, technical assistance from the French Development Agency in reinforcing irrigation systems will contribute to safeguarding against adverse weather conditions.

Pushing For Transformation

The cocoa sector has undergone a number of reforms in recent years, many under the stewardship of the World Bank, including institutional and fiscal reforms aimed at promoting transparency in management and guaranteeing income generation for producers. “The government’s objective, in terms of cocoa production, is to supply 50% of total global consumption,” Yté Wongbé, CEO of the National Agronomic Research Centre, told OBG.

Other significant government reform efforts have focused on boosting local value-added production, with the aim of processing half of all beans locally by 2020, although recent political unrest could stall newly planned grinding projects. An estimated 30% of Côte d’Ivoire’s annual cocoa bean production is transformed locally through 12 grinding facilities around the country.

Major international companies with grinding operations in the country include the US’ Cargill, Switzerland’s Barry Callebaut, France’s Cemoi and Singapore’s Olam International, while the largest local grinders are Choco Ivoire and Ivory Cocoa Products. These facilities have an installed on average processing capacity of 760,000 tonnes, according to Assi, yet the actual processing capacity is estimated to be around 570,000 as of 2014 — a 20% increase in beans processed compared to 2013. “Current processing capacity in Côte d’Ivoire stands at 700 000 tonnes. If we operate at 100% capacity, only 40% of the cocoa will be processed, meaning that the current capacity will need a boost if the government wants to reach the objective of 50% by 2020,” Benjamin Bessi, managing director of Cemoi, told OBG.

Government Efforts

This increase is largely in line with a government push in recent years to increase local processing and thus increase the share of processed cocoa exported. This forms part of the government’s strategy to further reduce the country’s exposure to volatile international markets.

“Exporting exposes you to a lot of uncertainties,” Suraj Rao, second vice-president of the Association of Cashew Exporters of Côte d’Ivoire told OBG. “Beyond market fluctuations, you may face currency risk, political risk and so on. If any of such risks manifest themselves, you can be in default of your export contracts.”

The government, therefore, has launched a series of incentives to attract producers towards increasing their processing capacity. The special export tax (droit unique de sortie, DUS) is now for instance lower for processed and finished cocoa products rather than for beans. According to Assi, exporters of raw cocoa beans face a 14.6% DUS, while those exporting cocoa powder only face a 9.6% DUS. Exporters of cocoa are charged a 14.6% DUS across the board. “The government’s objective is to transform 50% of the cocoa production into semi-finished products. However, export taxes are still comparatively high, limiting the competitiveness of processors,” Ismail El Khalil, president and CEO of Ivory Cocoa Products, told OBG.

Moreover, a new legal framework around processing is expected to be implemented on April 1, 2017, detailing new fiscal benefits for producers choosing to transform their raw product domestically resulting in a reduction of taxes to 13.2% for cocoa masse, 11% for butter and cake and 9.6% for powder. Moves like these have helped attract new investors, most notably in May 2015 when Cemoi opened a factory with an annual production capacity of 10,000 tonnes of chocolate products. The $7m factory brought the total value of Cemoi’s investments in the sector to more than $69m, according to a Reuters report. While the cocoa sector experienced a difficult 2015/16 production season, pre-2016/17 season rainfall should balance the sector out and yield a stronger year for cocoa bean producers. The government, the historical driver and regulator of the sector, has also begun pushing for local transformation.