Due to increased demand, primarily as a result of rising consumption in booming economies like China, West African cocoa farmers are under increased pressure to boost production. They thus require trade finance to fund expansion, writes Ayo Akinfe.
Translated into English, cocoa means food of the gods and for decades it has provided a means of sustenance to millions of farmers across West Africa. With the sub-region now gradually becoming integrated into the global economy, cocoa could provide a means through which West Africa starts trading on an equal footing with the rest of the world.
Unique among every other bulk commodity in the world, cocoa is one crop that cannot be produced everywhere, as it stubbornly refuses to be cultivated outside the tropical rainforest. As Australian and other producers elsewhere have found out, cocoa will not grow without the canopy of the tropical rainforest, meaning that despite the fact that chocolate is consumed in the northern hemisphere, it remains a southern crop.
Outside Sub-Saharan Africa, other major producers include Brazil and Indonesia but due to the devastation of Witches Broom Fungus in the 1990s, Brazilian production has fallen significantly and the constant menace of typhoon and El Nino-afflicted weather has hampered enhanced output across Southeast Asia. Despite determined efforts by other parts of the world to get in on the act, the four western African nations of Cote d’Ivoire, Ghana, Nigeria and Cameroon account for over 70% of global production.
Since the collapse of Brazilian production in the early 1990s, Cote d’Ivoire has emerged as the world’s undisputed largest producer, with an annual crop in excess of 1mn tonnes. Of the world’s total crop of about 3.3mn tonnes, almost 2.3mn comes from western Africa, making the role of the region’s millions of small producers vital to the global cocoa economy.
Constantly under pressure from international donors to diversify their economies, step-up agricultural output and increase foreign exchange earnings, governments across the region are doing a lot to increase production. Not only are they trying to boost the production of raw cocoa but they are also looking to add value to their beans with the increase in local grindings and possibly migrate towards chocolate production itself at some stage in the future.
Nigerian cocoa market potential
In Nigeria for instance, 2005/06 production stood at 195,000 tonnes but under an ambitious programme to raise this to 600,000 tonnes by the end of the decade, the government has distributed free seedlings to farmers, offered subsidies on fertilisers and pesticides and encouraged banks to offer interest-free loans.
So far, output is nowhere near what traders would like it to be, however, and many exporters have urged the government to do more so they can cash in on current high prices of nearly US$2,000 a tonne.
Farmers too do not think the government is doing enough and believe that more action needs to be taken if the industry is to survive. Most worrying is the fact that a majority of Nigeria’s farmers today are elderly and the industry is not proving attractive to young people.
Alaba Arogundade, a leading producer and chairman of Arogundade Farms urged cocoa-producing states and the federal government to help farmers raise production and enhance Nigeria’s earnings. He says that such support is important if the government wants to encourage young people to embrace farming.
Arogundade adds: “I am aware that a majority of our cocoa farmers are not happy that the federal government has failed to put smiles on their faces despite the clamour about cocoa rebirth. Nigeria has agricultural resources which can provide adequate jobs for millions of our people, raise gross domestic product (GDP) and provide enough funds for the citizenry but a situation where government’s assistance does not go beyond private arrangement and personal relationship is not good enough.
“Cocoa has played a major role not only in the economy of Ogun, Oyo, Ondo, Ekiti states but the nation’s economy too since independence. Cocoa is now Nigeria’s most important agricultural export, hence, why we are saying that farmers must be assisted.
“For example, between 1975 and 1980, cocoa replanting and rehabilitation schemes were expected to raise hectarage from 17,604 to 642,700 hectares, while exports were projected to reach 369,000 tonnes at the end of the period. The historical and projected roles expected of cocoa in our national development notwithstanding, the industry is having production and marketing problems that need government assistance.”
Arogundade pointed out that quality is also an issue as cocoa beans are judged by their purity, flavour, consistency and moisture content.
He adds: “For instance in the 1990s, it was discovered that cocoa which was introduced into the country in the late 19th century, encountered fungal problems. Therefore, it is normal that the cumulative yield losses from pests and diseases arise from the observation that output of a perennial crop in a given year is a function of the existing tree stock, the age distribution of the stock and the yield coefficients of trees of different ages.
“Also, pests and diseases in the early years of plants affect their survival to fruit bearing or maturity age. For instance, the attack of mirids, together with fungi can cause serious defilation damage to young cocoa plants and thus affect their future yield capacity significantly. Today, it is estimated that pests lead to average losses in cocoa production of 15% to 20% for the country, while blackpod disease results in an average of 30% to 40% loss.”
Jamiu Popoola, the chairman of Popoola Farms, says that although, the Cocoa Research Institute of Nigeria has developed cocoa seedlings with an 18-month gestation period compared with the old seedlings which took about four to eight years to mature, things are still difficult. He adds that some farmers see the 18 months as not much better than the four years since they do not have funds to buy these new seedlings.
“Government must also shift its attention to the research institutes to provide varieties for farmers and assisting them in disseminating soil fertility management. With the current level of poverty and hunger, assisting the cocoa farmers would the right step in the right direction for this administration,” he adds.
Financing opportunities
Peter Jones, the chief executive of the agency Africa Trade Insurance (ATI), believes that things are changing, with increases in output being matched by a move towards value-addition. He adds that at some stage in the future, he would like to see his agency get involved in trade finance, particularly with regards to African coffee and cocoa.
Jones comments: “We provide credit risk insurance on a farmer’s buyers in order that he may obtain bank financing on better terms and conditions as the risk of non-payment by his buyers becomes that of ATI. We are actively seeking to expand our membership into West Africa as soon as possible and facilitating trade and investment in the commodity sector will be a key component of the value addition that ATI’s product offering will bring to the region.
“Indications are that there is measurable investment flowing into Africa to enhance agricultural production including in the coffee and cocoa sub-sectors. Africa as a continent has vast resources including land, which if appropriately managed with better trade and investment facilities could meet the required standard of supplies set by traders and processors.”
He stresses that most governments now appreciate the need for value addition if they want to enhance returns from export earnings. He adds that this is leading to a gradual rise in semi-processing, particularly in East Africa.
According to Jones, as a result, ATI is receiving an increasing number of enquires from manufacturers for investment risk insurance in the cocoa and coffee sectors.
“Once value-addition is established through semi-processing and processing facilities within the region, farmers are likely to realise more from their output as they will be much closer to the final buyer of their produce. Also, with increased investment and corresponding returns, sufficient resources could be directed towards combating problems encountered during production.”
As cocoa demand looks set to grow due to increased consumption, particularly in the booming economies of China and India, West African producers are expected to see their returns from exports grow.
Unless output rises significantly , the gulf between growing demand and stagnant supply could lead to significant price increases and trading houses are aware of this, hence the recent focus on expanding production.
Finance houses are key to any expansion plans as they need to step up their lending to small scale producers through a host of means and the use of new instruments.
Mainstream commercial banks are also getting in on the act, as almost all of them have trade finance departments, with desks dedicated to agricultural activities.
Natixis, the French banking group for instance is very active in the West African cocoa industry and is looking to extend its services there.
Francois Monnier, Natixis’s head of softs, says: “The primary African softs we finance are cotton, coffee and cocoa. In Cameroon and Burkina Faso we finance cotton, while we finance coffee and cocoa in the Cí´te d’Ivoire, Ghana and Togo.
“We advance trade finance to some of the small traders who work in the region although for now we do not finance farmers directly. Companies operating in these West African countries are generally more risky than those operating in Brazil but probably on a par with India, Vietnam and Indonesia.”
According to Monnier, banks like Natixis usually finance small and medium-sized trading houses on a trade finance basis and the large ones like Archer Daniels Midland (ADM), Noble and Louise Dreyfus more on a corporate finance basis.
He stresses that West African cocoa producers may find it hard to increase output to match the growing demand.
Monnier adds: “West African producers are already operating to capacity. Increased interest from China and Asia in general, may put upward pressure on cocoa prices over the long term.
“While Ghana is seriously working on increasing its production by using more fertiliser, Cote d’Ivoire production has been decreasing over the past three years. The current supply shortage favours the producers as there is more long-term demand than current supply capacity.”
He adds that we are likely to see an increase in grinding and semi-processing at origin, particularly in Ghana, where the Ghana Cocoa Board (Cocobod) has authorised Cargill and ADM to set up new grinding facilities. Cocobod is believed to be talking to other trading houses too about increasing their presence in the local processing market.
“In Ghana at least, ADM and Cargill are good proof that manufacturers want to invest in production capacity. If the price increases then the farmers should start to benefit, especially in Ghana where the farmers automatically receive 70% of the Cocobod selling price.
“We may see increased activity from Chinese traders looking to source cocoa in the region to address the growing demand in their market. China is of course becoming more involved on the continent as they look for the superior quality cocoa from Ghana Cocobod, for example.”
Confident in its market, Cocobod recently decided to increase its debt facility to US$900mn from US$780mn as part of a drive to make it better equipped to deal with changing market conditions. This new facility was arranged with Natixis, Société Générale, Standard Chartered Bank and Ghana International Bank acting as joint mandated lead arrangers.
To safeguard investors, the facility is fully underwritten by the joint mandated lead arrangers and will be used to purchase cocoa beans for the 2007/08 season. It will be secured at all times by the assignment of firm and fixed price cocoa export contracts entered into between the Cocobod and international traders.
Under the terms of the arrangement, the borrower taps the market each year to purchase cocoa beans for the following season. Cocobod, a wholly state-owned commodity board, established in 1947 (the collection of crops has been privatised, but the Cocobod remains wholly state-owned), is now partially private.
Cocobod’s functions are to purchase, market and export cocoa from Ghana, as well as to help develop and encourage production.
Generally, the Cocobod mandate is considered the biggest and most important annual soft commodity syndication in Africa. Not only is Cocobod an internationally renowned and highly regarded organisation, considered to be one of the premier cocoa bodies in the world but it also has a good reputation when it comes to paying its farmers.
Market developments
In neighbouring Nigeria, the cocoa market was fully privatised in 1986, while in Cí´te d’Ivoire and Cameroon, their marketing boards were dissolved in the 1990s.
Ghana has followed a more gradualist route as the immediate aftermath of rushing towards privatisation led to severe hardships for farmers in neighbouring countries.
This rushed privatisation boosted smuggling as Ivorian farmers tried to get their beans into Ghana where they were guaranteed a good price because the government underwrote some of their risks by guaranteeing a minimum price.
Of late, however, this has abated as remunerative prices have made smuggling unnecessary and has encouraged farmers to bring their produce to market almost immediately.
Isaac Osei, the Cocobod chief executive, says that as his board celebrates its 60th anniversary this year, the main challenge it faces is to effectively implement appropriate policies which will improve the cocoa industry and lead to the attainment of its 1m tonnes production target.
He adds that he was proud that through the efforts of the management, staff and stakeholders, and the support of the government, Cocobod has become one of the most respected and foremost commodity institutions in Africa.
“Our target will surely be attained through productivity-enhancing schemes, modernisation and expansion of logistics and improvement in quality assurance systems. Our status has translated into an ability to lift the trade finance facility for cocoa purchases to new heights with annual amounts involved increasing from US$260mn in 2000/01 through to US$650mn in 2003/04 up to US$900mn in the current crop year,” Osei says.
He adds that in line with the government’s policy to promote domestic processing of up to 50% of national output, Cocobod would continue to support and promote the private sector to play an active role in that regard. Osei notes that in this respect, bean supply agreements that are being signed with new companies are critically examined with a view to evolving a policy that will protect the interest of Cocobod and investors.
“Both existing and prospective cocoa processing companies will continue to be encouraged to add more value to our beans beyond cocoa nips and liquor to finished products,” he stresses. Osei adds that financiers are interested in investing in Ghanaian cocoa because the country’s farmers through their extreme sacrifice, hard work and commitment produce good quality cocoa.
Traditionally, Ghanaian beans have been the best in West Africa and have always been bigger than those of their neighbours. Subsequently, Ghanaian farmers have been more contented than their Ivorian counterparts.
Last year, farmers in Cote d’Ivoire went on strike in October to protest over low prices when traders started paying them less than the 80 cents per kg they had hoped for. At the height of the strike, members of Anaproci, the trade union which represents 80% of Cote d’Ivoire’s 700,000 cocoa farmers, refused to deliver cocoa to the country’s ports.
Some 7mn of the population of Cote d’Ivoire, out of a population of 18mn depend on money from cocoa and backed the farmers when traders began paying growers less than the indicative price of 80 cents per kg set by Ivory Coast’s Coffee and Cocoa Exchange. They were also upset about the fact that the government had done nothing to allay fears over a warning about the spread of the swollen shoot virus. This virus, which defoliates and can eventually kill cocoa trees, has been damaging yields in West Africa of late but its impact has been most felt in Cote d’Ivoire
ATI’s Jones says that with revenue rising and farmers getting paid more for their beans, they should now be in a better position to combat the spread of disease. He adds: “With increased investment and corresponding returns, sufficient resources could be directed towards combating problems encountered during production.
“In the Cote d’Ivoire, we should see an increase in production too now that peace has returned to the country. While it is difficult to say with certainty, it is safe to imagine that once peace prevails, positive outcomes in the economic sector follow, which in this case would include the coffee and cocoa sub-sectors of the country.”
Law firm DLA Piper, which has a lot of expertise in commodity finance, is advising banks and financiers interested in expanding into Africa. Present in 32 countries worldwide, DLA Piper believes that size, influence and global reach are important because they help it bring the right talents and experience to bear on the needs of each client, whatever their size and wherever they may be.
A company spokesman reports: “We provide multi-disciplinary advice to leading banks, trading houses and insurers in both transaction and contentious work. We advise on matters such as warehouse financing and other industry standards, export credit arrangements, pre-export financing, political risk insurance and securitisation.
“Our global network allows us to help clients capture both ends of trade flows in a way that many legal service providers cannot. We have a particularly strong presence in Africa and in Hong Kong our trade finance team provide a full range of legal services to both banking and corporate clients in the Asia region. We recently advised a syndicate of lenders structuring and documenting the largest cocoa financing in Nigeria, including the inter-creditor/agency documentation.”
On the whole, the global cocoa economy is rather optimistic and it appears that better times await West African producers. A combination of increased global demand, greater access to finance, more local processing and more activity to combat disease can only mean that the future is rosy.
How prepared the global trade finance industry is to take risks in the sector may well be a key determinant of how quickly the sector develops, industrialises and blossoms into a wholly integrated part of the global economy.
