On average, Côte d’Ivoire produces 40% of the total global cocoa crop each year, and the industry employs roughly 800,000 mostly small-scale farmers, making it an essential source of income for the national economy.
Besides supporting the livelihood of populations in rural areas across the country, cocoa production is also a critical contributor to state finances through taxes and export levies. A report by ratings agency Moody’s forecast that the persisting drop in cocoa prices would have a substantial impact on the Ivorian economy, given the commodity’s prominent role, with cocoa accounting for 43% of its merchandise exports in 2015. According to data from the International Cocoa Organisation (ICCO), the monthly averages of daily global cocoa prices fell from $3350 in December 2015 to $2290 one year later, and continued to fall over the course of 2017 to reach $1920 in December of that year. In attempt to mitigate the fallout from lowering prices, the government announced in April 2017 that it was cutting its budget for the year by 10%.
Excess Supply
The global excess in cocoa production was partly caused by favourable climatic conditions across many major cocoa-producing countries in 2016. The effects of the weather phenomena El Niño in West Africa in particular helped to drive production up in Côte d’Ivoire and Ghana, which are the top-two cocoa producers in the world.
In June 2017 the ICCO forecast the 2016/17 season to yield global excess of 371,000 tonnes of cocoa beans. This is substantially higher than its February 2016 estimates, when it predicted excess volumes of 264,000 tonnes. Total global output was expected to reach a record 4.7m tonnes – a yearly increase of 18.1% – with the ICCO attributing the bulk of this to volume surges from Côte d’Ivoire and neighbouring Ghana. The ICCO has stated that the excess of output in the market as well as prices being at historically low levels is a scenario that is likely to continue over the coming years. If this is indeed the case, the situation will force countries with a high dependency on cocoa exports to review their production and marketing strategies.
Falling Prices
In response to the prolonged difficult market conditions, the Ivorian government lowered the minimum price guaranteed to cocoa farmers in March 2017 which reduced it by 36%, from CFA1100 (€1.65) per kg to CFA700 (€1.05) per kg. The move sought to encourage more cocoa sales; however, it was criticised for coming halfway through the crop season, and brought the minimum guaranteed price to its lowest point since the 2012/13 season.
In order to maintain production levels while cocoa farmers adjusted to the change, authorities removed some of the cost barriers for the industry, temporarily suspending a 5% registration fee charged to cocoa exporters, along with other taxes associated with the commodity’s mid-season crop. These provisional cuts have meant that as much as CFA45bn (€67m) was saved by players in the cocoa production and exporting system, rather than going to government coffers. “With prices of cocoa down, the state has reduced taxes as a means to keep the growers interested in production,” Joachim Lezou, operations manager of agriculture at the French Development Agency in Abidjan, told OBG.
The situation was heightened further, however, when cocoa prices hit a 10-year low in mid-2017. Although speculation is, to a certain extent, an influencing factor in the price drop of cocoa, domestic production numbers are also having an impact. Local exporters not honouring their contracts have also contributed, and increased production is another driving factor.
Rising Output
Overall, Côte d’Ivoire’s cocoa output has generally climbed over the years, despite some minor setbacks caused by adverse weather conditions. The country’s cocoa production rose from 1.4m tonnes in 2012/13 to almost 1.8m tonnes in the 2014/15 season, before falling moderately to 1.5m tonnes in 2015/16. Total figures for the 2016/17 season had not yet been released as of February 2018, but according to the Council for Coffee and Cocoa (Conseil du Café-Cacao, CCC), the country’s output had already surpassed 1.8m tonnes as of July 2017.
Rising cocoa output in several producing countries has not been met by global demand expectations, however. Two of the world’s biggest economies, China and India, have experienced an upsurge in the average buying power of their populations, expanding the size of the middle class in both countries.
This, however, has yet to translate into large increases in chocolate consumption. Average annual per capita consumption of chocolate in Western Europe is about 4.7 kg, according to a report by Moody’s. By comparison, India and China average 0.1 kg annual chocolate consumption per capita.
On the demand side, the behaviour of cocoa prices over the coming years will be most influenced by changing chocolate consumption patterns in countries that currently have relatively low levels of demand.
Cocoa Reform
The fall in prices and consequent impact on Côte d’Ivoire’s budget is the first shock seen since the cocoa industry reforms put in place in 2012, when authorities established a minimum guaranteed price to be paid to cocoa farmers for their crops and a forward sales system that allows 80% of each year’s crops to be sold in advance.
Under the reforms, the state also created the CCC, which is tasked with keeping prices stabilised as well as ensuring that at least 60% of the international price for cocoa is reverted back to the farmers. The minimum price guarantee mechanism was credited with helping to improve the livelihood of local farmers, and as international cocoa prices climbed between 2012 and 2016, more income went into the hands of the country’s cocoa growers.
From 2012 to 2017 Ivorian cocoa farmers earned a total of CFA7.3trn (€11bn), according to statistics from the CCC. In order to protect the industry against potential decreases in international cocoa prices, the 2012 reform provided for a reserve fund held at the Central Bank of West African States.
Restructuring
The challenges of the 2016/17 season are set to prompt sector operators and national authorities to rethink how the cocoa market is structured. “Following the reform in 2012 and up until the 2015/16 cocoa campaign, sector stakeholders were satisfied; prices had been fixed and respected, and we were in a market that was growing,” Mariame Bedie, executive director of the Professional Group of Cocoa and Coffee Exporters, told OBG. “It was a difficult campaign, but it ended positively in the sense that it enabled the country to export its cocoa. However, in terms of the sector, it is true that a lot of players were hurt.”
Although the full impact of the 2016/17 season is still unknown, several cocoa exporters defaulted on exporting contracts, resulting in the CCC tapping into its reserve fund in order to make up the difference to farmers. For the 2017/18 season, the CCC has lowered the number of accredited exporters, from 93 to 72. Further international cooperation may help to improve the segment on a regional level.
As neighbours, Côte d’Ivoire and Ghana share bordering cocoa production areas. During a meeting held in Abidjan in April 2017 between Ivorian President Alassane Ouattara and Nana Akufo-Addo, Ghana’s head of state, the two countries agreed to coordinate production and marketing strategies of their respective cocoa regulatory bodies. Ghana produced approximately 840,000 tonnes of cocoa in the 2015/16 season, and was aiming to reach the 1m-tonne mark in the 2016/17 season, making cooperation in this industry a priority for both countries.
Sustainable Growth
Besides re-evaluating how cocoa is marketed and the relationship between Ivorian producers and exporters, the long-term development of the industry will have to consider other issues, such as the health of cocoa trees and the crop’s role in deforestation problems in Côte d’Ivoire. For instance, intensification of cocoa production on smaller plots of land would do much to avoid aggravating deforestation. “The small-scale, artisanal plantations in Côte d’Ivoire have an average of 1000-1320 trees per ha. Today we can plant using in-house protocols and soil conditions that permit up to 2500 trees per ha,” Indranil Ghosh, deputy managing director at Solea International, a firm that improves yields at large-scale cocoa farms with biotechnology and enhanced cultivation methods, told OBG. By comparison, producers in South America can host up to 6000 cocoa trees per ha, due to the more favourable growing conditions.
Crop Disease
The long-term sustainability of cocoa crops is also threatened by disease, as the advanced age of a large percentage of the country’s plantations has made many crops vulnerable to cocoa swollen shoot virus (CSSV), a disease which negatively impacts production yields, eventually killing the cocoa trees. The disease first appeared in Côte d’Ivoire in 2003, and since this time it has spread to infect 12% of the country’s total cocoa farms, according to government estimates. “Cocoa is under two threats: falling prices and diseases like CSSV. The expansion of diseases is reaching areas such as Soubré and Tabou, which are very important cocoa production zones. If it reaches those parts of the country, the consequences will be even worse,” Lezou told OBG.
On top of challenges such as climate change, crop disease and price volatility, in the future the cocoa sector will need to take into account the need for yield improvements and modernisation, while still maintaining its role as a sustainable lifeline for a considerable portion of the local population.
Farming Methods
Changing farming methods will be essential to securing sustainability in the industry. “The use of bio-solutions by farmers will need the support of retailers,” Sébastien Couasnet, CEO of ELEPHANT VERT, a Swiss firm that creates and promotes bio-inputs-based solutions, told OBG. “Sellers of produce will need to encourage sustainable agriculture practices, as they produce better quality products and help preserve the health of the soil, thus meeting the global challenges of increased food needs and environmental concerns.”
Scaling up cocoa production could bring several advantages, such as better traceability methods and improved training of human resources, and may ease some of the existing sustainability issues. However, because it supports the livelihood of many local farmers, small-scale cocoa farming looks set to remain the norm. “I don’t think there is going to be a binary situation where it is only going to be large-scale plantations or small farmers. More likely, you will have a coexistence of both,” Ghosh told OBG.
In order to ensure the cocoa segment’s continued sustainable contribution to GDP, authorities will need to work towards continually improving conditions for cocoa farmers, as well as reducing exposure to international price fluctuations while making efforts to mitigate deforestation damage as the segment expands.
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