The cocoa industry is performing strongly on the back of emphatic intervention by the public sector and a commodities price explosion. What does the future hold?

The last seven years have seen the highest production levels since cocoa was first cultivated in Ghana in the late 19th century. Ghana’s oldest agri-cultural sector is determined not to be outdone by its new competitor – oil and gas – as the country’s most strategic export.

Prior to 2003, when cocoa production crossed the 700,000 tonne mark for the first time, production had peaked only once, in 1965, at 580,000 tonnes.

Productivity had reduced steadily through the 1970s to a record low of 158,000 tonnes by 1983. Between 1984 and 2002, the country recorded an annual average production of 300,000 tonnes.

Current annual production of cocoa ranges from between 650,000 to 700,000 tonnes. Furthermore, Business Monitor International estimates production will reach 838,000 tonnes for 2010/11, which would represent a 13% increase over last year.

Production will be nearing one million tonnes within the next four years fuelled by rising GDP, which would hopefully allow farmers to access increased credit to expand their output.

However, the impact of the present Eurozone debt crisis cannot be ignored as the euro’s depreciation against the local currency affects the competitiveness of exports to Ghana’s largest market. On a positive note, global consumption of cocoa is expected to rise by 3.5%.

The cocoa sector has been a good example in the nation’s quest to find the right mix of public and private sector collaboration, and cocoa’s transformational role in the socio-economic development of Ghana is said to have contributed to the country’s achievement of reducing poverty by half since the early 1990s.

Conversely, domestic cocoa consumption, although predicted to rise by almost 20%, does not even constitute 2% of current production levels, amounting to a meagre 16,300 tonnes annually. Chocolate in Ghana is considered a luxury product.

Industry insiders like to downplay the affect of neighbouring Cote d’Ivoire’s political strife over the last decade on Ghana’ cocoa industry, preferring to cite government initiatives as the reason for recent positive developments. The end of the Ivorian crisis may negatively affect production as farmers may be more inclined to smuggle into Cote d’Ivoire where they obtain higher prices for their produce.

However, the persistent security issues at the border may prevent this from taking hold in the immediate term. Moreover, many Ivorian farmers are switching from cocoa to rubber production as they consider this more secure. Regardless, the price of cocoa in Ghana remains fixed at a lower price than that on the international market, although it was recently raised to GH¢3,200 per tonne, or GBP1,427 per tonne.

Global Cocoa Prices

A World Bank report titled, “Cocoa in Ghana: Shaping the Success of an Economy,” lauded the collaborative efforts between government and farmers in the industry. In particular, the government is commended for its attempt to mitigate post-harvest losses that arise from disease and pests, and for promoting the use of new planting materials and technologies from the Cocoa Research Institute.

For example, between 2001 and 2003, when the state cocoa agency, Cocobod, combined mass insecticide spraying of cocoa trees with the planting of new hybrid trees that fruit in three years instead of eight, annual cocoa production more than doubled from 340,000 to 736,000 tonnes.

“With the exception of 1998-2000 and 2003-06, world cocoa prices have steadily increased since 1990,” the World Bank report said. “This, combined with a higher share of the price being passed on to farmers, has offered farmers increasing real producer prices.”

Besides Cocobod’s intervention to raise cocoa productivity, the report points to other factors that contributed to the success of Ghana’s cocoa sector, including improved marketing through partial liberalisation and a higher pass-through rate to farmers of f.o.b. prices.

“A variety of models estimating the sensitivity of production supply to farm gate prices find that small-scale cocoa producers in Ghana have responded positively to these price incentives,” the report added.

However, the report questioned whether the industry would not have performed better had it been fully liberalised. Starting from the early 1980s when it became evident that the cocoa industry was fading into oblivion, major reforms were introduced in a desperate attempt to reverse the situation.

After the 1992 elections, which returned Ghana to democratic rule after 19 years under the military, Cocobod shed a significant number of its staff - from more than 100,000 in the early 1980s to 10,400 in 1999, and then to about 5,100 in 2003 - based on the logic that a leaner organisation is more efficient and less costly to run.

Transportation of cocoa from the interior to the main export port, Takoradi, was shifted to the private sector, while the government focused on developing feeder roads to the cocoa growing regions.

Cocobod also ended its control over all domestic purchases by allowing private companies to compete with its former purchasing agency, the Produce Buying Company (PBC), to buy and transport cocoa from farms to markets. Cocobod, however, remained the industry regulator that set the minimum price for the purchase of cocoa.

Payments to farmers have become more reliable, and corruption, which characterised the contractual negotiations when the PBC was the only buyer, has diminished. While licensed buyers may not compete on price, the report indicates that they do offer occasional price bonuses, subsidised inputs, or credit extensions for producers.

“This partial liberalisation appears to have benefited producers,” the report said.

“The internal marketing of cocoa has also become more competitive in recent years, with nearly 20 private licensed buyers, along with PBC, procuring cocoa through nearly 3,000 buying stations manned by purchasing clerks or individuals from cocoa communities who purchase the crop on the buyers’ behalf.”

The World Bank explains that Cocobod also played a financing role, extending funds to producers at below market rates. Cocobod also monitors bean quality. It is reported that the government agency declared purchases to Cocobod by cocoa buyers from the start of the season in October to March 17 as having increased by 42.6% from the 2010 season. Unfortunately, although licensed buyers are free to export, none of them is large enough to obtain the minimum amount of the commodity to qualify as an eligible exporting company.

Although the World Bank is positive about the partnership between Cocobod and farmers, it questioned whether the symbiotic relationship between the state and the private players in the industry was the best thing for Ghana’s cocoa sector. After examining the experiences of liberalisation of cocoa sectors in Nigeria, Ghana, Cameroon and Cote d’Ivoire, several conclusions are made.

The assessment determined that improvements in competition did not really affect the value chain on the export side as local companies could not fully engage with multinationals in the market due to limited access to global financing, and some have even been forced to withdrawn from the market. Internal trade, however, has grown.

The World Bank report also pointed out that, with regards to the share of the f.o.b price passed on to farmers: “The proportion is higher in countries such as Cameroon and Nigeria, but Ghana’s government has made concrete efforts in the recent past to raise the share similarly. Finally, in relation to the price stabilisation objective, Ghana has clearly been successful in reducing farmers’ exposure to price variability during the crop year through its practice of forward sales.”

The cocoa sector has been a good example in the nation’s quest to find the right mix of public and private sector collaboration, and cocoa’s transformational role in the socio-economic development of Ghana is said to have contributed to the country’s achievement of reducing poverty by half since the early 1990s. Cocoa’s strong performance bodes well for Ghana going forward.