Aug 02 2010

Markets, at long last, deliver for West Africa’s cocoa farmers

Category: Uncategorized<ADMINNICENAME> @ 10:49 AM

Cocoa farmers in West Africa – growers of the main portion of world cocoa supply – are distant actors in a weird rumble over prices, which recently hit a 33-year peak, achieving the highest prices on record since 1977. The proximate cause of the record price is speculative activity by commodities traders, especially a particular hedge fund, Armajaro of London, which recently shocked financiers by actually taking deliver of physical cocoa.

The financial drama has masked a fundamental shift in the pricing of one of Africa’s most prized outputs. Cocoa is essential in the manufacturer of chocolate and producers, who are largely clustered in the neighboring countries of Ghana and Ivory Coast, have long failed to form a cartel to drive up prices, much in the same oil producers (OPEC) do. In economic terms, cartels can make sense, rewarding owners of a relatively scarce commodity.

Common and concerted action is often required for a cartel to take hold. When governments try to form cartels – say, to fight back against traders in the world’s big cities – they must hew to the same script. In the case of Ghana and Ivory, such common action has never been possible. Since independence in 1957, Ghana’s government has closely controlled the sale of cocoa, essentially nationalizing the crop through a cocoa board that acts as a single selling agent on the international market and prices on farmers who by law must sell their crop to the government. Ivory Coast, by sharp contrast, has long permitted farmers to sell to anyone, on the open market, at any price they can fetch. The result is that farmers in Ivory Coast gain more money from their cocoa than farmers in Ghana; it also means that official production in Ivory Coast is boosted by smuggled cocoa from Ghana.

The cartel of international cocoa buyers – chiefly America’s ADM and Cargill and Zurich-based Barry Callebaut – all of three of whom exist in close cooperation with a small group of global end users, concentrated in Europe and the U.S. – benefited greatly from the schism between Ghana and Ivory Coast on cocoa policy. Lower prices were the result. For decades even, Western companies, and consumers, benefited from ultra-low prices of raw cocoa, which fueled the expansion of cheap chocolates in groceries and sweet shops.

The days of inexpensive cocoa are unlikely to return. One expert told the Financial Times on July 30 “If you consider the fundamentals, I’d tend to say prices won’t fall. There’s no fundamental reason why cocoa should become cheaper.” And that’s not because of the changing practices of commodity traders. Demand for cocoa is already high, China (largely chocolate-free today) represents a new frontier and cocoa supply is stagnant, so a re-evaluation upward of cocoa has occurred.

The benefits to African farmers should be significant over time. Unlike some other crops, new gardens can require years of planning and labor. Existing trees are subject to blight and aging and must be worked intensively to maintain yields. When I visited Ghana’s cocoa-growing region a year ago, I was struck by the prosperity of farmers I met but also the relative inflexibility of growing cocoa. Expansion of output is hard to achieve. Inputs, such as fertilizers, are expensive and are used less than they should be by non-organic growers. New trees take years to reap fruit. Field labor is surprisingly costly. Producers also fear a glut; they can benefit from stagnant production too.

Ghana’s independence leader, Nkrumah, once dreamed of setting cocoa prices in Accra and Abijan, not in London or Chicago. A producer cartel proved impossible, and cocoa farmers in West Africa suffered. Now a “market cartel” has emerged. West African cocoa farmers, and their families, should be cheering. Capitalism, so often the instrument of their oppression, is now working dramatically in their favor.

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