Ghana, Ivory Coast to leverage cocoa production capacity to enforce new pricing mechanism

Ghana and Ivory Coast, which produce two-thirds of the world’s cocoa, will leverage their production capacities to ensure the industry adheres to the living income differential (LID) pricing mechanism, the advisor to both countries on the LID, Joseph K. Forson, has disclosed.

The two countries cancelled all cocoa sustainability schemes run by U.S.-based Hershey, accusing the chocolate maker of trying to evade the payment of the US$400 LID per tonne of cocoa to farmers, aimed at combating farmer poverty.

“What we are targeting to do is to leverage whatever strength we have to get them to adhere to the pricing mechanism that we think will help our farmers,” Mr. Forson said in an interview with Business24.

“Eventually, if we need to disrupt the value chain a bit, we would disrupt [it]. This is purely commercial,” the advisor emphasised.

The two countries accused Hershey of sourcing unusually large volumes of physical cocoa on the ICE futures exchange in order to avoid the premium. In view of this, third-party companies are also being barred from running sustainability schemes in the West African nations on behalf of Hershey.

The schemes certify cocoa as sustainably sourced—meaning its production is free of environmental and human rights abuses, such as using child labour or being grown in a protected forest.

“They used a very technical strategy to avoid paying the LID. This isn’t illegal because the futures market structure allows for it; however, it is immoral and unethical,” Mr. Forson noted.

He added: “There has been a clear agreement that the right things need to be done to support cocoa farmers and the LID is what we all agree on.

“Using technical strategies is equal to abusing the futures market—because our understanding of the way the futures market is supposed to be used is to hedge and not to play games like taking physical delivery just to avoid paying the LID.

“We are dealing with the action taken by Hershey and our reaction is a signal to the rest of the market; thus any industry processor or brand that would try any technical maneuvers, we will bring them out.”

The first year of the LID has been very successful, he said.

“Between the two countries, about US$1.5bn was generated from the LID, and all of the amount realised has been passed on to the farmers. This specifically led to the 28 percent increase in Ghana’s cocoa producer price and 26 percent increase in that of Ivory coast,” Mr. Forson disclosed.

An estimated 80 to 85 percent of the 2020/2021 cocoa crop was sold under the LID pricing mechanism.

The advisor also revealed that the two countries have already started selling the 2021/2022 crop using the LID pricing mechanism.

Global cocoa prices

Cocoa prices on Wednesday fell to two-week lows on global demand concerns after Fitch Solutions said that global 2020 cocoa consumption would fall for the first time since 2016 as Covid lockdowns this year undercut cocoa demand.

Reports by barchart.com indicate that robust supplies from the Ivory Coast, the world’s largest cocoa producer, are bearish for cocoa. Ivory Coast government data last week showed that cocoa bean deliveries at the ports from November 23–29 were up 18.5 percent year-on-year (y/y) at 93,560 metric tonnes (MT) and cumulative cocoa bean deliveries during October 1 to November 29 were up 12.1 percent y/y at 786,035 MT.

However, smaller cocoa supplies from Ghana, the world’s second-largest producer, have been estimated as a positive factor for cocoa prices. Data showed that cocoa purchases from Ghana during October 1 to November 5 totalled 146,886 MT, down 10 percent y/y.

Another positive factor for cocoa prices was the announcement by the International Cocoa Organisation (ICCO) last week that it had cut its global 2019/20 cocoa surplus estimate to 19,000 MT from a prior estimate of 42,000 MT.