As a follow-up to the webinar we organized with the Swiss Platform for Sustainable Cocoa as a part of their Cocoa Tertulia series on financing the transition to regenerative agriculture practices, we reflect on the impact of rising cocoa prices on the Ivorian supply chain, and implications for smallholder farmers, exporters and processors.
Côte d’Ivoire stands as the world’s largest cocoa producer, contributing 40 to 45% of global production, with neighboring Ghana as the second-largest producer accounting for 15% of global production following recent declines in production. Annual cocoa production in Côte d’Ivoire represented 10% of the country’s GDP and 35 to 40% of its exports last year, with about two-thirds of cocoa beans in Côte d’Ivoire being exported and processed abroad.
Most cocoa in Côte d’Ivoire is grown on smallholder farms, who produce on average ca. 1 metric ton of cocoa per year on 3 to 3.5 hectares of land. Approximately 75% of the annual yield comes from the main harvest between October and March, and 25% from the mid-crop harvest between May and August. The abundance of small cocoa producers in Côte d’Ivoire results in them having little market power, effectively rendering them price takers.
In the past month, cocoa futures hit record highs, reaching USD 12’095 per metric ton on ICE this morning (22 April 2024), up from about USD 2’800 per metric ton this time last year. This sharp increase in prices is attributed to crop disease and adverse weather conditions driven by factors including climate change, among other factors. How does this translate into farm-gate prices received by farmers in the upcoming main season and impact financing needs?
Côte d’Ivoire’s cocoa market is highly regulated, with the government introducing the Conseil du Café-Cacao (CCC) in 2011 after more than a decade of a liberalized cocoa market. Côte d’Ivoire has a price-fixing mechanism, where CCC sets a guaranteed minimum farm-gate price for cocoa, like in Ghana, where Cocobod regulates prices. In September, before the main cocoa harvest season starts, the CCC pre-sells 80% of the expected total harvest in the season, fixing the farm-gate price at 60% of this pre-sale value. The aim of this is to ensure a minimum price to farmers throughout the harvest season, reducing price variability and intermediary bargaining power. This means that smallholder cocoa farmers in Cote d’Ivoire will benefit from increased revenues only once the CCC sets a more favorable price in the next main season. In a historic move, the CCC increased the farm-gate price of cocoa beans in early April already by 50% to reflect this surge of international cocoa prices. However, in case of a market downturn, at the start of the main season, the question is if the CCC would fix an increased price.
The current surge in cocoa prices increases the working capital required by cocoa traders and exporters to secure the same amount of cocoa beans. New sustainability regulations also contribute to increased pre-harvest financing needs (working capital), as well as longer term investments with farmers. This confirms a trend that we are observing: the physical and political manifestations of climate change impact the amount and timing of capital required by traders and exporters, including working capital. The situation is particularly acute in emerging and developing markets, and where production is dominated by smallholder farmers. Commercial banks are not able to increase financing limits and fully address the increasing demand, highlighting the importance of alternative financing mechanisms such as impact funds – especially when such a lender is able to provide season-long loans (i.e., pre-harvest, unsecured finance).
Impact investors can also enable more accountability and action on sustainability topics in supply chains. This includes engagement with traders, exporters, and farmers to improve data collection and reporting, such as information that promote compliance with increasing sustainability demands of customers and regulators. Technical Assistance can be added to help further improve environmental and social resilience, including to climate change. Financing from impact investors can therefore contribute to the resilience of smallholder farmers and their business partners, exporters and traders.
Civil unrest and political factors might have influenced the price increases in 2002 and 2010 in Côte d’Ivoire. The next presidential election is scheduled for October 2025, at the start of the main harvest season, and farmers constitute a significant portion of the electorate. With many corporates lamenting high cocoa prices, will the industry manage to attract the necessary capital to meet the short and long-term transition finance needs?
Sources include:
https://www.seo.nl/wp-content/uploads/2020/04/2016-79_Market_Concentration_and_Price_Formation_in_the_Global_Cocoa_Value_Chain.pdf
https://www.kakaoplattform.ch/about-cocoa/cocoa-facts-and-figures.
https://www.statista.com/statistics/263855/cocoa-bean-production-worldwide-by-region/
https://www.adaptation-undp.org/scala-building-a-resilient-cocoa-culture-in-cote-d-ivoire
https://www.sciencedirect.com/science/article/pii/S0306919222001580
https://www.fao.org/prices/en/#:~:text=Farm%2Dgate%20prices%20refer%20to,charges%20for%20selling%20the%20produce
https://www.just-food.com/news/cote-divoire-raises-cocoa-prices-50/
https://www.bnnbloomberg.ca/ivory-coast-s-cocoa-farmers-win-price-hike-as-futures-soar-1.2054135
https://www.ice.com/products/7/Cocoa-Futures/data?marketId=7049930