Saturday, October 21, 2006
CRISIS WITHIN THE COCOA SECTOR
“ A well defined problem is half resolved.” Einstein
Source of the problem
STRUCTURAL OVER SUPPLY ( Supply > Demand )
Declining prices of cocoa on the world market
Vicious trap cycle
Structural oversupply of cocoa results in low and declining prices of cocoa on the world market To make up for the loss in income resulting from the initial price decline, farmers produce more cocoa, which leads to a further excess supply of cocoa, further reducing both world cocoa prices and farm gate prices, thus further impoverishing and marginalizing cocoa farmers. This is a vicious trap cycle which MUST be broken.
Example: Ghana ( 2nd largest producer of cocoa in the world)
In response to declining prices of cocoa on the world market, Ghana increased its production from 320,000 MT to 450,000 MT between 1996 and 2000. This led to an excess supply of cocoa on the world market, with a resulting further 40% decline in the price of cocoa during the same period.
“Structural over supply in the commodity market lies at the heart of global poverty and instability.” ( Brandt Report, 1980)
Proposed solution to break the vicious trap cycle of declining prices of cocoa resulting from structural over supply.
I. SET UP A COCOA CARTEL
Eight countries produce over 90% of the cocoa in the world; Ivory Coast is the largest producer and exporter of cocoa with around 40%; Ghana (20%),Cameroon (5%) and Nigeria (5%) produce around 30%; Thus, four countries in West Africa produce and supply around 70% of cocoa in the world. The balance is supplied by Indonesia (13%) and other countries in Asia and in South America.
Thus, if these countries set up a cocoa cartel – similar to the OPEC oil cartel – they could mutually-agree on cocoa production quotas and prices - in equilibrium with market forces (i.e. Supply = Demand) – which will be mutually beneficial to all cocoa producing farmers and countries.
According to the following analysis measuring the impact on cocoa prices resulting from adopting an OPEC like cartel strategy to increase and stabilize cocoa prices:
“The top 3 producers make up about 74% of total world cocoa output. If they agree to reduce by 25% their respective outputs, the ending stock ratio should dive to about 23%, enough to propel the price to more than $2000/ton. This translates to 75% more dollar proceeds in absolute amount for them even after taking into account the 25% reduction compared to what they are getting at the current $850/ton with their present output.”1
II. VALUE ADDITION
However, increasing and stabilizing cocoa prices is a crucial necessary first step but is far from sufficient in itself; cocoa producing nations must also ADD VALUE to the cocoa -instead of exporting raw cocoa- so as to break free from the dictate of the world market and to significantly increase their earnings. Furthermore, local value addition will create investment, employment and will generate income within the sector, thus creating economic growth. The wealth generated from local value addition will also enable the government to collect more taxes in absolute terms which can be used to invest in infrastructures to attract further investment within the sector (i.e. power supply, roads, etc.), thereby creating a favorable environment for local value addition of cocoa and other primary agricultural commodities facing the same problem (i.e coffee, cotton, etc.)
Currently, cocoa producing nations are caught in a vicious trap cycle which prevents them from processing the cocoa locally: Cocoa processing firms and chocolate companies do not process the cocoa in the country of origin mainly because it is not profitable for them to do so, i.e. because the infrastructures required to efficiently and profitably do so are lacking (i.e. power supplies, roads, etc) and because of the insecure investment environment resulting from political instability, which translates into further economic instability, further reinforcing the vicious cycle.
Increasing and stabilizing prices of cocoa by setting up a cocoa cartel would address and help solve these issues and will provide the necessary foundation to further process the cocoa locally.
1) It will translate into higher farm gate price for cocoa farmers, thus reducing poverty among the cocoa farmers.
2) Higher farm gate prices will in turn translate into both a more stable political environment and higher revenue for the government which can (hopefully) be reinvested into the infrastructure required to attract further investment into the sector for local value addition of cocoa and other primary commodities ( coffee, cotton, etc.)
3) Local value-addition of cocoa will provide employment and income for the local inhabitants, thus effectively reducing poverty among the local population. However, local value addition by itself will not reduce poverty among the local population, unless both the cocoa farmers are paid a “fair” price for their cocoa which is calculated and based on actual cost of production and the other economic actors along the local supply chain- i.e. farm laborers, factory workers, etc.- are paid “fair” wages and are employed using non-exploitative labor practices; Finally, the wealth generated from local value addition of cocoa must be shared equitably among the local actors working throughout the local supply chain. Local value addition without distributional justice in the wealth created from value addition will NOT reduce poverty among the local population in countries producing primary commodities.