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(Bloomberg) – The world's two largest cocoa producers are taking unprecedented steps to increase market control to help farmers. The problem is that they could end up doing exactly the opposite.
The Ivory Coast and Ghana plan to jointly introduce a premium of $ 400 per metric ton in their sales, which is called a vital income differential. This decision could ultimately prompt producers to increase production, while high prices reduce consumption and the industry faces a dangerous scenario of expansion and slowdown, according to traders and badysts.
"As we can see, there are unexpected consequences for farmers," said Marcelo Dorea, Senior Commodity Trader at First New York Investment Company and a veteran of the industry. "Over time, this could lead to sequential structural surpluses and inevitably lower futures prices."
Farmers will be making themselves felt in the 2020-2021 season, which will begin on October 1st. It is only a few weeks before the elections in Côte d'Ivoire and a few months before citizens go to the polls in Ghana to possibly help the governments in place to collect votes. Both countries account for more than 60% of the world cocoa supply.
"The government will seek to use this information to tell farmers how much they are loved," said Godfred Bokpin, senior lecturer in economics at the University of Ghana in Accra. "The dividend comes when votes are needed."
Producers in Côte d'Ivoire and Ghana are likely to benefit, as production from other countries is not enough to supply the chocolate industry. But in the meantime, buyers will be kept at bay and the stalemate could prevent larger producers from selling their futures, which would open the door to higher prices in a market where speculators are already holding big bets. bullish.
Cocoa can increase more on the floor price as demand increases: BI Commodity
Farmers like Michael Acheampong, who runs a cooperative with 1,500 farmers in the city of Kwarbeng, about 100 kilometers north of Accra, are already banking on this project.
"This is very timely and it is the only act that will prevent the fortunes of the cocoa industry, which is no longer losing, a possible collapse," he said .
But in the long term, higher prices will lead to overproduction, which will hurt farmers' incomes that countries are trying to protect. This will also boost the plantations of competing producers, including Nigeria, Cameroon and Ecuador, where the premium paid on the physical market could also increase.
"Côte d'Ivoire's cocoa has no economic benefit over Nigeria that justifies a premium of $ 400 a tonne," said Jonathan Parkman, co-director of the Marex Spectron Group's agriculture in London. "Thus, the true beneficiaries of the scheme in its current form will be, in the long run, the other qualities of cocoa."
Rising costs should also weigh on demand, which is already showing early signs of weakness. Global chocolate sales remained stable in the quarter ended April, after eight consecutive months of growth, said Barry Callebaut AG in a presentation of its results this month, citing data from the company's badysis Nielsen.
"The vital income gap of $ 400 per tonne dramatically increases the cost of cocoa for every manufacturer and end user, which could potentially dampen emerging market consumption at current prices," said Eric Bergman, Product Broker. Basic at Jenkins Sugar Group Inc.
Trader impact
The plan is also likely to hurt traders and processors, who will have to pay the vital income differential in addition to the premium they pay on the physical market. Many will find it difficult to be exposed to such high premiums on futures as they are generally unable to cover them, while others may find it difficult to pbad on the costs.
Barry Callebaut has already warned that if he agrees with the principle of what Côte d'Ivoire and Ghana want to do, this decision will result in higher costs for butter and cocoa powder, products of bean processing, to from 2020.
"Margins are tight," said Judy Ganes, president of J. Ganes Consulting, in Panama City, Panama, adding that she was already "tough enough to bear cost increases."
If history is a guide, it is likely that countries will struggle to control prices. Unlike OPEC, which exercises its power by controlling supplies, Ghana and Côte d'Ivoire want to drive up prices. In 1987, Ivorian President Félix Houphouët-Boigny tried to drive up prices by banning sales, which did not allow them to reduce by half of the workforce at the end of the embargo, 1989.
"Whenever groups of producers try to control the market and set minimum prices, that fails and the market deteriorates afterwards," Ganes said. "My concern remains the expected consequences that price support mechanisms will lead to further oversupply and ultimately to depressed values."
To contact the reporters on this story: Isis Almeida in Chicago at [email protected], Ekow Dontoh in Accra at [email protected]
To contact the editors in charge of this story: Tina Davis at [email protected], Millie Munshi, Reg Gale
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