Global demand for cocoa will reach 4.5 million tonnes by 2020 – 1 million more tonnes than are currently being produced. But the 2015 Cocoa Barometer predicts that the world may soon run out of cocoa beans due to low productivity and mismanagement in West Africa, where the vast majority of the commodity
is produced. Is the game up for the cocoa industry? Eleanor Wragg reports.
Soaring demand from emerging markets and increasing Western appetite for darker chocolate helped make cocoa one of the few commodities to rise in value in 2015, climbing from US$2868.27 per tonne in April to US$3345.65 by December – a 17% increase. Indeed, cocoa’s star has been rising for some time: global demand for the commodity has risen by an average of 2.5% every year since the 1960s; but production has failed to keep up.
The strain is already being felt. According to BMI Research, while the US, Europe and Japan make up almost 50% of global cocoa demand, growth among large emerging market consumers, particularly Russia and Brazil, will be in the double digits out to 2018. “Overall, the growth in consumption, combined with the stagnation in production, means that we forecast the global stocks-to-use ratio to fall to 30.2% by 2017/18, well below the preceding 19-year average of 44.9%,” reads the firm’s January Commodities Forecast.
“Market speculators continue to predict a deficit in global cocoa supply,” says Patrick Abban at Barclays’ office in Ghana – the world’s second-largest bean producer after Côte d’Ivoire. “On the demand side, the growth of the eurozone and emerging markets in Asia, specifically China, are major prospects for global cocoa demand.” He adds that both Côte d’Ivoire and Ghana are planning to increase production output further in the medium to long term.
Still at the top
Côte d’Ivoire, by far the world’s largest producer at around 45% of global output in last year’s bumper season, looks set to hold onto its leadership position, with newly re-elected president, Alassane Ouattara, vowing that the country will produce half of the world’s cocoa by 2020. He has implemented measures to do so, including increasing the farm gate price – the amount paid to cocoa farmers – to around US$2.50 per kg, up from US$1.50 per kg previously.
As a result, “much less smuggling of cocoa is going on to neighbouring Ghana, as it is no longer necessary for people to look for better pricing options”, explains Robert Besseling, executive director of specialist intelligence firm Exx Africa. The price increase also gives the farmers themselves a much better standard of living, which means that they are more likely to stick with cocoa rather than turning to other cash crops.
However, Besseling points out that implicit in the Ivorian government’s setting of a fixed farm gate price is that major international investors would have to reciprocate in local content assets to remedy the current situation where out of the previous season’s 1.75 million tonnes of cocoa, just 540,000 tonnes were processed domestically.
“The problem for Africa is that there are too many incentives for African producers to produce raw cocoa beans, rather than actually making cocoa products or chocolate,” says Edward George, head of soft commodities research at pan-African banking group Ecobank. “Cocoa really isn’t part of the West African diet, and it’s still very much a luxury. What there needs to be is real investment in R&D for cocoa products which suit African diets. If you are producing a crop that is mostly for consumption outside the country, in order to add any value in the country, there must be tax incentives. The way the market is currently set up, with nearly all of the consumption in Western Europe and the US, the consumers and the chocolate companies are the ones calling the shots, not the African producers.”
The capital of cocoa
The relocation of the world’s regulator of cocoa might contribute to changing this situation. In a largely expected but still momentous decision late last year, the International Cocoa Organisation (ICCO) announced it will move its headquarters from London to Abidjan. “This will essentially make Côte d’Ivoire the hub and the capital of cocoa,” says Besseling. With this season’s harvest looking likely to beat last year’s record crop, the country is further strengthening its position in the industry to the extent that the power may shift from international cocoa firms to producers.
“Companies in Côte d’Ivoire are coming under a lot of pressure to comply with local content legislation, and if they don’t there are punitive actions. That is probably the first time that this is happening in the cocoa sector, where countries like Côte d’Ivoire are now in such a strong industry position that they are in a position to enforce this kind of legislation,” says Besseling. Now, with the ICCO in Abidjan, the country is seen as gaining a much greater influence in local content and exporting decisions. “We’ll see a much higher percentage share being processed locally as local exporters will have to improve their capacity
to fulfil their contracts,” points out Besseling.
Investment is already pouring into the country, with commodity trader Olam opening a US$75mn cocoa processing plant in the port city and cocoa trading hub of San Pédro in March last year. Dubbed “one of the world’s most advanced cocoa plants”, it is powered by a boiler fed with waste biomass from cocoa shells, and will produce cocoa butter, cocoa cake and nib roasted liquor. Meanwhile, a US$7mn chocolate factory set up by French chocolatier Cémoi will produce cocoa powder and chocolate spreads before moving onto producing tablets. Tristan Borne, the firm’s managing director, reportedly told journalists that the products are destined for the local market, with progressive expansion to the sub-region planned at a later stage. This is the latest investment in the country for the firm, which has invested US$69mn in facilities in Côte d’Ivoire since it started its grinding operation there in 1996.
It may not be smooth sailing for the Ivorian cocoa industry, however. While the country, no stranger to internal conflict, is enjoying a period of relative peace for now, there is potential for armed disruption around San Pédro. “The south-west of the country does not support the president,” explains Exx Africa’s Besseling. “Over the last few months, Côte d’Ivoire has been ramping up its security in response to Islamic threats in the north, and therefore most of the defence resources have been shifted away from the political hotspot in the southwest to the Islamic terrorist hotspot in the north. That has left the southwest region open to hardline opposition groups,” he cautions.
Nigeria aims high
There may also be competition from the country’s neighbours. Nigerian agriculture minister Audu Ogbeh, a farmer, recently told local press that the current oil crisis may be a “blessing in disguise” for the country’s cocoa industry, which has suffered decades of under-investment. He is targeting production of 1 million tonnes by 2020 and calling for an annual increase of 5 million trees to boost the giant African economy from fourth-largest cocoa producer to first place.
Not everyone is convinced, however. “With Nigeria there is a lot of optimism, but very little realism,” says Ecobank’s George. This growing season has already been marred by unfavourable weather and pest outbreaks, while the country’s grinding sector is in serious trouble because of the rise in the cost of raw beans and a sharp fall in the local currency, the naira. Ecobank research also cites high production costs (especially that of electricity), erratic cocoa output and the lack of a supportive regulatory environment. Multinational cocoa grinders have already by and large exited the sector, with the few remaining local grinders warning that they too might have to close down. There is also the issue of infrastructure bottlenecks, with delays created around the major ports providing a major barrier to cocoa investment in Nigeria.
Ghana targets smugglers
After Ghana’s falling currency saw smuggling of as much as 100,000 tonnes of cocoa into neighbouring Côte d’Ivoire during the 2014/15 season, President Mahama’s administration set a new producer price of cocoa at US$1,759 per tonne to encourage local farmers to raise their output. Other measures include bonus payments and a stabilisation fund to insulate growers against shocks on the international commodity market. Market onlookers are hopeful that this will help to keep Ghana’s cocoa in Ghana. “Illegal cross-border trade used to exist between Ghana and neighbouring countries. This was attributed to price differentials. With the new producer price, this phenomenon no longer exists,” says Barclays Ghana’s Abban.
The industry has also managed to attract trade finance from local and international banks thanks to its regulated cocoa trading companies known as “licensed buying companies”, who aggregate cocoa stocks by purchasing cocoa from small farms which they then sell to the government’s marketing board.
“Banks can support financing of licensed buying companies’ (LBCs) operations including guarantees to [Ghana Cocoa Board] Cocobod to secure direct seed fund financing towards the purchase of cocoa beans,” says Abban. “Opportunities are also there to support the domestic cocoa processing industry to enable them to export value-added cocoa products such as cocoa liquor, cake and powder. Further financing could be offered to suppliers of cocoa inputs such as fertilisers, and finally international banks can, and do, participate in Cocobod funding through the annual syndicated loans that are taken out.”
Indeed, Cocobod’s most recent annual pre-export finance facility of US$1.8bn was oversubscribed by 44%, with banks offering up to US$2.6bn.
While Ghana is seen as more politically stable than its neighbour, the 2016 elections are cause for caution. “We are likely to see the incidence of political violence increasing over the next six months in the lead up to the elections, which doesn’t actually cause much risk of damage to the assets in the cocoa industry but does increase the risk of disruption of exports,” says Besseling. Another worry is the so-called “generation gap” in the industry, whose farmers are an average age of 55. Back-breaking work for low pay isn’t appealing to the country’s youth, and the government, although considering incentivising its unemployed youth to go into cocoa farming, has yet to come up with a concrete policy.
Outside of West Africa, Brazil and Indonesia are the next most important producers of cocoa, but both countries’ industries appear to be in decline, with witches’ broom fungus decimating the Brazilian industry and ageing tree stocks and poor weather hurting Indonesian farmers. Not so for upstart Ecuador: after implementing education programmes for producers as part of an attempt to diversify away from heavy crude oil exports, its higher-quality beans have found willing buyers around the world. ICCO figures show the Latin American country boosted output by 6.8% in the 2014/15 season, with similar growth expected this year.
“Ecuador is the one to look out for,” says Ecobank’s George. “They have been experimenting with large-scale industrial plantations of cocoa, and that might prove the key because cocoa production globally is almost entirely done by smallholders. If you can develop a model that uses plantations, which can be much more efficient, you could hugely increase production. If Ecuador can work out the way to do that, then we might suddenly see Ecuador becoming a leading producer.”
But regardless of the competition, there is more than enough room in the market for everyone. “At the moment, we have flows of West African cocoa going to the new grinding hubs in Southeast Asia, in Indonesia and in Singapore. There is rising demand for chocolate products in China and India, which is going to suck in more and more cocoa, and the only place it can come from is West Africa,” says George.
It is clear that for the foreseeable future, West Africa is likely to continue to dominate the global cocoa production industry, but it remains to be seen if the right policies and regulation are in place in order to meet the world’s ever-growing appetite for chocolate.