Harnessing opportunities in surging world cocoa prices for Ghana's economic development

News of the recent spike in global cocoa prices to an all-time intraday high of $10,080 per metric ton on Tuesday, August 26, 2024, which was followed by a 0.3% decline to close at $9,622, has generated optimism among industry participants, especially in cocoa-producing nations like Ghana.

This development means that the price of cocoa has increased by 129% thus far in 2024, marking more than a triple increase in the price of cocoa over the past year. The surge in prices follows poor harvests in Ghana and Ivory Coast and consequent significant supply shortages mainly from these two major producing countries due to issues such as extreme heat, aging cocoa trees, and illegal mining.

However, despite the significant increase in cocoa prices, there are reasons to believe that this may not necessarily translate into immediate gains for Ghanaian farmers and the government. This is primarily due to the intricacies of cocoa pricing mechanisms, the government's policy of setting cocoa prices at the beginning of the year, and the utilization of cocoa-syndicated loans coupled with hedging strategies.

Firstly, the cocoa market operates through futures trading on exchanges such as the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) in London. While surging cocoa prices may benefit traders and speculators, the benefits to farmers are often mitigated by the timing of price adjustments. In Ghana, cocoa prices are typically fixed by the government at the start of the farming year. This means that Ghanaian farmers usually do not immediately reap the full benefits of price increases, even if there is a notable boost in global cocoa prices later in the year. Farmers might be protected from market swings by the government-set fixed pricing, but they might also lose out on the profits from unexpected price increases.

Second, the Ghanaian government's reliance on cocoa-syndicated loans further complicates the process of directly translating increases in cocoa prices into benefits for farmers and the government. By using syndicated loans, the Cocoa Board of Ghana (COCOBOD) obtains financing from a group of banks to buy cocoa beans from farmers. These loans are typically obtained at the start of the cocoa season to finance various initiatives aimed at boosting cocoa production, like providing fertilizers, controlling pests, and productivity enhancement programs. However, the use of syndicated loans means that the government has already locked in prices for cocoa purchases, regardless of any subsequent price increases in the market. Additionally, the government uses hedging techniques to mitigate the risk of price volatility, which further detaches price rises for cocoa from direct benefits to farmers and the government.

The writer

Furthermore, there are doubts regarding syndicated loans' ability to achieve sustainable growth, even though they have been crucial in funding initiatives to increase Ghana's cocoa production. While a recent study published in the African Journal of Agricultural and Resource Economics titled “Loan syndication and cocoa production: Evidence from Ghana” found a positive short- and long-term relationship between syndicated loans and cocoa production, the growth in syndicated loans and cocoa production as reported by other studies generally shows largely erratic correlations, indicating that increases in syndicated loan size may not always translate into proportionate increases in cocoa production. This begs the question of how well the existing strategy will work in the long run to maximize the advantages of rising cocoa prices for farmers and the government.

To tackle these obstacles and guarantee that farmers in Ghana and the government can benefit more meaningfully from the rising price of cocoa, I propose three key measures for consideration namely flexible pricing mechanisms, diversification of funding sources, and investment in value-added activities.

Flexible pricing mechanisms:

Adopting flexible pricing mechanisms will mean moving away from fixed rates and toward a structure that takes into account the dynamic nature of the cocoa market. For Ghanaian farmers and the government to derive maximum benefit from the rising price of cocoa, flexible pricing systems must be put in place. By embracing adaptable pricing structures, both parties can navigate market uncertainties, promote fair profit sharing, mitigate risks, and sustain long-term growth in the cocoa industry. This may be done, for instance, by implementing a variable pricing policy based on a market index. In this way, the government could tie cocoa prices to a market index, like the New York Cocoa Exchange, rather than establishing a fixed price for the commodity at the start of the season. This would imply that local prices would move in line with changes in the price of cocoa globally, thereby benefiting our hardworking farmers. 

An alternative method is to apply the price floors and ceilings method. This strategy entails establishing a floor price, or the lowest price below which cocoa prices cannot drop, and a ceiling price, or the highest price over which prices cannot climb. To safeguard cocoa farmers from abrupt declines in world prices, the government may, for instance, ensure that they receive at least a set price per ton of cocoa. Prices could also be capped to avoid unnecessarily high inflationary pressures. Such an approach in my estimation enhances the welfare of cocoa farmers and fosters a more resilient and sustainable cocoa sector which ultimately inures to the benefit of the government. 

Diversification of Funding Sources: 

Ghana currently largely depends on syndicated loans to fund its initiatives related to the production of cocoa. Although syndicated loans have played a crucial role in supplying initial funding, their continuous reliance comes with some challenges and constraints. 
For instance, when cocoa prices fluctuate, Ghana is exposed to financial risk through the fixed-price contracts linked to syndicated loans. In times of surging cocoa prices, Ghana finds itself locked into contracts that do not reflect the current market value, thereby limiting its potential gains from the price increase. On the other hand, in times when cocoa prices are falling, Ghana would find it difficult to fulfill its end of these fixed-price contracts, which would increase its burden of debt. 

Moreover, though the hedging techniques associated with syndicated loans provide some degree of protection from unfavourable market fluctuations, it is not without its problems. Transaction fees, margin restrictions, and the demand for complicated financial instruments are some of the extra expenses and complications associated with hedging. In the end, these expenses may lessen the net advantages of higher cocoa prices by undermining the profitability of activities aimed at producing the crop. To overcome these obstacles and reap the full benefits of the rising cocoa prices worldwide, which is going to be the trend for a long time per the forecasts, the government ought to consider broadening the sources of funding for ongoing and new initiatives aimed at producing cocoa. This can be done by seeking other options such as grants, concessional loans, public-private partnerships, or even bond issuances to access capital markets.

Investment in Value-Added Activities: 

I am inclined to believe based on available data that Ghana would gain a great deal by shifting its attention from solely increasing cocoa production to value-added industries like cocoa product processing and sales. Ghana could increase its share of the value chain and generate income sources other than raw cocoa exports by diversifying into value-added enterprises. Ghana's GDP can be expanded by increasingly attracting more investments into the processing of cocoa into higher-value products like cocoa butter, cocoa powder, chocolate bars, and more, which can command premium pricing in foreign markets. Besides, value-added activities in the cocoa sector, such as processing, require skilled labour and infrastructure, which translates into job creation and economic growth. In fact, funding these initiatives not only boosts employment but also the growth of related industries like retail, shipping, and packaging. 

In conclusion, structural limitations including fixed pricing procedures and reliance on syndicated loans provide hurdles to fully achieving the gains to be had in this sector, though the recent spike in cocoa prices presents an even greater opportunity for Ghanaian farmers and the government to benefit. It will take a variety of strategies, and concerted effort by the government and its agencies, strategists, civil society organisations or farmer advocate groups, cocoa farmers, and citizens at large pressure to address these issues. The strategies as stated above include reforms in the areas of pricing mechanisms, financing strategies, and investment priorities within the cocoa sector. By adopting a more holistic and flexible approach, we could better position our nation to harness the potential benefits of surging cocoa prices for sustainable agricultural development and poverty reduction.

Oscar Onai, Economist and Strategy Consultant
Email: oscarekonai@gmail.com