Plans by the world’s largest cocoa producers to pay growers more for their crop may help to sway voters in coming elections, but are likely to be unsustainable beyond next season.
Ivory Coast and Ghana are considering increasing the farm-gate price for cocoa by as much as 21% to offset a decline in prices for the chocolate ingredient. Cocoa futures for December delivery have dropped up to 14% this year because of the impact of the coronavirus on demand.
“Governments in both Ghana and Ivory Coast are seeking to dampen the economic blow of the pandemic on poverty levels as they head to the polls later this year,” said Nathan Hayes, an analyst at the Economist Intelligence Unit. “Supporting incomes in the cocoa sector will play a vital role in this, given the large share of employment as well as indirect economic benefits the cocoa sector plays in both economies.”
Ivorian President Alassane Ouattara is expected to announce the price increase in the capital, Yamoussoukro, a stronghold of the main opposition, the Democratic Party of Ivory Coast. He’s seeking re-election in a vote scheduled for Oct. 31.
He may be banking on a similar strategy employed in Ghana in 2016, when the three biggest cocoa-producing regions helped the opposition win power after it promised to raise farmers’ pay. Ghanaian President Nana Akufo-Addo is also running for re-election in a Dec. 7 vote, squaring off against his predecessor, John Mahama.
The two West African nations account for 65% of global cocoa production.
While higher prices will improve conditions for cocoa growers, they may also contribute to a market surplus as demand growth struggles to keep pace with potential increased production, according to Hayes.
Both countries are trying to boost their grinding capacity to process half of their beans locally in a bid to absorb some of the demand. They’ve also made attempts to limit cocoa output to spur prices further.
“Efforts to cap production are unlikely to materialize, owing to difficulties in implementation,” Hayes said. “As such, we expect more rapid downward pressure on global cocoa prices in 2021.”
Long-term implications from the expected hikes will only become clear once cocoa prices recover from the impact of the pandemic, NKC Africa Economics said in an emailed research note. Low prices will make it difficult for the two countries to keep up farmer incentives without losing competitiveness and sacrificing market share, it said.
(Updates with grinding target in second paragraph below Weak Demand subhead.)
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