Ghana and Ivory Coast produce nearly 2/3 of the global supply of cocoa. Most of the 2m cocoa farmers in west Africa are smallholders and therefore have little influence on the world price. Why is it so difficult for poor countries to command higher prices for cocoa and controlling more valuable areas of the supply chain?
Ghana – supplies 20% of all cocoa beans – earns $2bn a year which is less than 2% of the value of chocolate that is manufactured, branded and sold. It seems that cocoa producers are in a colonial style relationship with chocolate manufacturers.
Chocolate – $100bn industry and Ghana and Ivory Coast who produce 65% of the raw material only earn $6bn – see image below. But why couldn’t these two countries have earned more money by processing the cocoa into liquor, cocoa butter or chocolate. One reason is the electricity costs and the industry likes to keep most of the added value near the western markets that it serves.
Opec to Copec
From October 2020 Ghana and Ivory Coast will have a fixed premium of $400 a tonne over the benchmark futures price. Opec controls 30-40% of global oil supply and have a significant role in influencing prices. Ghana’s vice-president Mahamudu Bawumia refers to this in the cocoa industry as Copec. The premium known as the ‘living income differential’ (LID) is intended to increase farm-gate prices so that farmers can have a much higher standard of living than they presently have. However unlike oil wells, cocoa trees cannot simply be turned off to reduce supply. Even if prices go up, say traders, that will encourage farmers to grow more which will increase supply and reduce the price.
Being a bigger part of the supply chain. As well as seeking higher cocoa prices, Ghana wants to add value to its product and give tax breaks to chocolate manufacturers to grind cocoa beans domestically. However there are issues:
- mechanised factories employ few people so tax breaks have a low return
- Ghana has a small dairy industry forcing manufacturers to import
- Electricity prices are high
- The climate requires greater refrigeration which means costs go up
Costs are always going to be more in Ghana than in Europe – also manufacturers are closer to their market in Europe. If consumers want to help poor farmers trading houses and big companies need to be cut out of the loop. At the moment there is a monopsony market.