Sweet nothings: what West Africa’s COPEC plan means for cocoa farmers

A bitter taste
International chocolate companies have little choice but to accept the premium. “Because of the size of these two countries and the scale of their production, it is pretty much impossible for people to avoid,” Jonathan Parkman, Joint Head of Agriculture at Marex Financial, explained to World Finance . “You can’t substitute two thirds of the world’s cocoa for something else. Certainly not in the short term.”

As Parkman explained to World Finance , the $400 premium makes Ghanaian and Ivorian cocoa a riskier investment. Chocolate manufacturers, processors and traders use the cocoa futures market to hedge their bets, but these companies can’t hedge the new premium and, consequently, can’t mitigate its risk.

The long maturation period of the cocoa bean means that families can experience long stretches with little to no income

“Previously, if you’d been transacting with Côte d’Ivoire or Ghana, the premium above the futures price that you’ve been asked to pay would be relatively small, and consequently manageable,” Parkman explained. “This is escalating that risk dramatically.” As a result, Ghana and Côte d’Ivoire’s premium could call into question how effective the use of the futures market is in mitigating risk within the industry.

No more sugar-coating
At a recent cocoa industry gathering, Ghanaian Vice President Mahamudu Bawumia said he was excited to create what he called ‘COPEC’ – an intergovernmental cocoa organisation inspired by the global oil cartel OPEC. With only two members, COPEC is certainly smaller than OPEC, which has 14 members, but it is a commodity cartel nonetheless.

Unfortunately for Ghana and Côte d’Ivoire, the success of such groups has been limited at best. In the 20th century, several cartels tried – and failed – to control the global price of certain products, including the International Tin Council (ITC) and the International Coffee Agreement. OPEC is considered to be more or less the only success story.

Mark LeClair, a professor of economics at Fairfield University and author of International Commodity Markets and the Role of Cartels , told World Finance that a group must fulfil several criteria to be considered a cartel. First, it should have only a handful of producers to facilitate negotiations. “Coffee, with 50 producing nations, failed this condition,” LeClair pointed out.

A cartel should also have significant barriers to entry, while the commodity itself should be non-perishable, without any close substitutes. “[Otherwise,] if I raise the price of cane sugar, as the sugar cartel did, I end up stimulating the production of a substitute, beet sugar,” LeClair explained. Lastly, the product needs to be homogenous, with only a few different ‘grades’. “Note that cocoa is homogenous, there are a very limited number of major producers, climatic requirements act as a barrier to entry, there are no good substitutes, and it is non-perishable in the near to medium term,” LeClair said. “Hence, cocoa is a good candidate for a cartel.”

But it could still fall victim to the issues that toppled previous such bodies. The ITC was established in the mid-1950s to regulate the price of tin. Member states bought inventory when prices rose and sold it when prices fell. However, a sustained period of high prices enabled Brazil, a non-member, to boost production and flood the market. The ITC ultimately went bankrupt in 1985.

Analysts warn the same could happen to COPEC. “If you get a big increase in farmer income, you’re going to get a correspondingly big increase in production,” Parkman told World Finance . “Introducing an arbitrary premium for [Ghanaian and Ivorian] cocoa is going to incentivise people to use other cocoas as well, for which they’ll pay more money. That’s going to create an incentive globally to produce more cocoa. And so down the road – maybe [in] two to three years’ time – we’re probably looking at significant oversupply. And that could cause a bust scenario.”

In the short term, the premium could positively impact farmers’ wages, but it’s unlikely to tackle the industry’s root problems. What’s more, it could create new issues. On the one hand, the rise in prices could overstimulate production and flood the market, leading to a global price crash and spurring deforestation. On the other, a long-term gap between the floor price and the prices in competing countries could see Latin America – which accounts for almost 20 percent of the world’s cocoa – swoop in and increase its market share.

Another important factor to bear in mind is the political motivation behind this decision, with both Ghana and Côte d’Ivoire holding general elections later this year. As farmers represent a large proportion of the countries’ respective voter bases, the premium may be first and foremost an electoral bid, one that won’t necessarily bring meaningful change to the lives of those it promises to help.