Changes in the way West African countries are selling their cocoa are bringing much uncertainty to the market. Paige McClanahan reports.


In November 2011, Côte d’Ivoire, the world’s largest cocoa producer, introduced significant changes to the way it markets its cocoa beans. The reforms – which were introduced by Ivorian President Alassane Ouattara, a former IMF official who took office in 2011 – amount to an overhaul of the Ivorian cocoa marketing system.

Under the new rules, the bulk of the country’s 2012/13 crop is being forward-sold in twice-daily auctions that began in February. A government body, the newly created Cocoa & Coffee Council (CCC), is overseeing the sales, which will terminate in October when the crops are harvested.

Based on the prices achieved in those auctions, the CCC will establish a benchmark price for cocoa, which will require that farmers receive no less than half of that price for any cocoa they sell during the 2012/13 season. The Ivorian government says that the new system is intended to stabilise farmers’ incomes and thus encourage growers to invest more money into increasing the productivity – and profitability – of their plantations.

But the new system has posed some challenges to those trying to finance the trade flows of those cocoa beans, says Edward George, head of soft commodities research at Ecobank in London.

“The strange thing is that [the Ivorian government] introduced the forward option ostensibly to increase the fairness and transparency of pricing, but they haven’t released any data on daily prices or volumes sold for the 2012/13 season,” says George. “Only at the end of June, four months after the auctions started, did the ministry of finance reveal that 830,000 tonnes had been forward-sold and that they expected the total to reach 910,000 tonnes by the start of the 2012/13 season in October,” he adds.

“So the uncertainly over how much cocoa has been sold and what will be available going into the next season remains, and yes, this will certainly have an effect on how the next season is financed,” George says.


A rocky start

Côte d’Ivoire’s new marketing system got off to a shaky start when several traders initially boycotted the auctions, which began in February. Major players such as Armajaro, Nestle, Cargill, ADM Cocoa and Olam all refused to take part in the auctions for the first few weeks.

“The specific rules were not clear enough,” a trader from a major Swiss cocoa buyer tells GTR, explaining why his company had chosen not to take part in the first round of auctions. “A lot of things had to be discussed before beginning something like that,” he adds. “It leaves you hugely exposed. We were just looking for more security.”

But all of the boycotts had been called off by the end of February, and things have reportedly been going relatively smoothly since then.

An Ivorian finance official said in April that the government was “satisfied” with how the auctions are going. “Everyone is participating in them now. It’s working well and without problems,” the official added.

“I think most of the companies doing business in Côte d’Ivoire are going to continue doing it there. They have no intention to leave,” says Ecobank’s George, noting that many of the companies operating in Côte d’Ivoire have long-term relationships there that they would be loath to abandon.

The changes to the marketing system bring Côte d’Ivoire’s cocoa market more in line with that of Ghana, the world’s second-biggest cocoa producer, where the government has long controlled the price of the commodity. Ironically, Côte d’Ivoire had a similar state-run system until 10 years ago, when the World Bank pressured the government to liberalise its cocoa market. Now, the switch back to a government-controlled price has come at the request of the International Monetary Fund, which listed cocoa market reforms as a condition for international debt relief.


Insecurity in Ghana

Similar hesitation among financiers of cocoa has been evident in Ghana with the financing round for the Ghana Cocoa Board (Cocobod) 2012/13 annual pre-export financing.

Cocobod’s 20th annual PXF was launched to general syndication on July 10; the deal is fully underwritten at US$1.5bn.
Only one group of 13 banks bid for the deal this year, which led to a delay in the transaction coming to market as it provoked much discussion around price discovery, a source close to the deal tells GTR.

The lack of financing options means that Cocobod is paying 175 basis points over Libor this year; nearly trebling last year’s 65bps. Last year the facility was launched at US$1.75bn and closed at a record US$2bn.

GTR’s source says that the company is unlikely to look for an oversubscription this year as “there is not a huge amount of capacity to borrow much else”.
The reduced size of the facility is reportedly due to the dramatic drop in cocoa prices this year, which is now averaging at US$2,200 a tonne. Cocobod is also committed to its US$200mn medium-term facility which was signed at the end of last year.

As per previous years, the PXF is expected to close by mid-September, with drawdown scheduled for October.

There had been expectations that the total for this year’s financing could rise above US$2.5bn. But, after over-reporting of beans by several licensed buying companies, and fears that Cocobod would not be repaid for its financing, international banks appear to be more cautious about financing the season.

“This time all of the banks effectively weren’t prepared to risk the big underwrite that would be required,” says Craig Polkinghorne, global head and director of structured trade and commodity finance at Standard Bank. “That tells you that the appetite and the willingness to underwrite and take a risk is significantly reduced from previous years.”

Part of that caution, says George at Ecobank, stems from the fact that controls within Ghana haven’t been as tight as some banks might have hoped.

“I think there has been some concern among the financiers who put money into this US$2bn financing for Cocobod that maybe the controls over lending out financing weren’t as strong as they should have been,” says George. “So they are going to be stronger this year. And a number of smaller local buying companies have lost their licences.”

“There was over-reporting of [cocoa] bean deliveries this year – at quite a high level. Up to about 70,000 tonnes was over-reported by their local buying companies, and that raised some concerns,” he continues. “But that discrepancy has gradually narrowed as more and more bean deliveries come in, particularly from up-country. It’s less than 20,000 tonnes now – it may be less than 2,000 tonnes by the end of the season.”


No slump in demand

Despite the recent concerns in both Côte d’Ivoire and Ghana, the long-term outlook for West African cocoa continues to be good.

Global demand for the product has stayed fairly high despite the global economic downturn. Some analysts had predicted that chocolate consumption in Europe and North America would slump alongside the struggling economy.

The current price of cocoa remains below average levels of the past five years.

“I think this is fair value at the moment,” says Daniel Diez, a cocoa trader at New York-based General Cocoa Company, noting that last year’s price spikes were largely due to the civil unrest that followed Côte d’Ivoire’s presidential election in late 2010.


Palm Oil

Palm oil – a product used in everything from liquid soap to ice cream and biofuels – has big growth potential across West Africa, and it’s attracting some new attention from both agribusiness companies and financiers.

One such financer is Ecobank, which is arranging US$300mn of financing for Olam Palm Gabon to create a 50,000 hectare palm oil plantation and refinery in Gabon. Once at full capacity, the project will make Gabon one of the largest palm oil producers in Middle Africa.

The loan is split into two tranches; US$228mn has already been raised with participation from Afreximbank, Ecobank, BGFI Bank Gabon and the Central African Development Bank. The second tranche of US$72mn is due to be finalised by the end of 2012.

Ecobank’s George tells GTR that the project could enable Gabon to overtake Côte d’Ivoire as the region’s largest palm oil exporter.

“The only significant exporter in the region currently is Côte d’Ivoire,” says George at Ecobank. This is largely because the palm oil produced in other West African countries, namely Nigeria, is used domestically. “There’s a real need to increase palm oil production, and there’s a huge potential,” he says. “In fact, the palm oil majors from Malaysia and Indonesia are looking to expand in Africa because they can’t get the land anymore in Southeast Asia.”

In Liberia, four major multinationals have promised a total of US$2.6bn in oil palm investment, and more could be coming soon. Investors include major players such as Malaysia-based Sime Darby and Golden VerOleum, a subsidiary of the New-York based private equity fund Verdant Fund.

Meanwhile, producers in Nigeria and Côte d’Ivoire are also looking to boost their production.

With global demand for palm oil expected to double by 2020, such large-scale investments will likely become ever more common across the region. With any luck, banks might regain their nerve and start lining up to finance the projects.



Coffee production in West Africa is still recovering after a major falloff in 2003 and 2004, when prices tumbled and many growers either turned to other crops or gave up farming altogether and moved to urban areas.

The farmers that managed to stick it out had less capital to invest in their coffee plantations, so product quality suffered even as production plummeted. But these days, things are looking up. Coffee production is growing quickly in Guinea, which has seen a 33% increase in production over the past year, as well as in Côte d’Ivoire, which saw 25% growth over the same period. Production is also on the rise in Sierra Leone and Togo.

As with cocoa, Côte d’Ivoire remains the biggest player in the region: the country is the 13th-biggest coffee producer in the world, and the third-biggest in Africa (after Ethiopia and Uganda).

Côte d’Ivoire mainly produces robusta coffee beans, which are used in espresso and instant coffee; and that’s good news for the country’s finances.

“The robusta price has been on a bull run since the start of the year, while in contrast Arabica has fallen off a cliff,” says George of Ecobank. “There’s very strong demand for robusta beans, and it doesn’t seem to be flagging.”

Massandjé Touré-Litsé, who heads Côte d’Ivoire’s Cocoa and Coffee Council, said in May that the regulatory body would launch an auctioning system for its coffee in June 2012. The system is set to be similar to the auction process that the country has already begun in its cocoa sector. As GTR’s supplement went to press, however, the Ivorian government had yet to make this change official.



Cotton production is also on the increase in West Africa, thanks largely to the fact that the price of cotton has stayed relatively high for the last two years. The promise of big profits has lured farmers back to the crop, which many abandoned after cotton prices slumped a decade ago.

West African cotton growers have reportedly forecast a 29% increase in output from the 2011/12 season to the 2012/13 crop. Much of that growth will come from increased production in countries like Senegal, Benin and Côte d’Ivoire, although the region’s traditional cotton heavyweights are still producing most of the commodity.

“Mali and Burkina Faso are leading the fray,” says George of Ecobank. “And maybe against expectations, Mali looks like it is going to regain top spot from Burkina Faso this year. Despite all of the problems in the country, cotton is growing in the south, and the cotton is still getting out and contracts are still being met.”

Despite the recent production spurt, however, West African cotton production continues to be overshadowed by output from major producers including China, India, the US and Brazil.