IS GHANA’S PLAN TO PROCESS 50% COCOA LOCALLY A BLUFF?

Ghana’s President, Nana Akufo-Addo, is no fool. That was apparent at the speech he gave to the Swiss delegation in which he announced plans to stop selling raw beans to Switzerland. But is this all an elaborate bluff? We summarise our reflections, and why we think that the statements coming from the West African countries are largely posturing.

What is Ghana actually saying they’ll do?

The Ghana Cocoa Board, COCOBOD, is upping the rhetoric and the Public Affairs Director Fiifi Boafo recently stated that the government has plans to ensure the country can process a full 50% or more of the cocoa beans it produces through local facilities. It is not clear who will own those facilities, however.

Ghana and the Ivory Coast together produce about 60% of the world’s cocoa. The entire value of raw cocoa beans worldwide is estimated to be US$12 billion – Fiifi Boafo, Public Affairs Director, COCOBOD

Yet he also points out that the value of the entire chocolate market is US$100 billion, roughly 10x greater than the value they are able to extract by selling the beans alone. So why wouldn’t they go after a bigger slice of the cake when they, after all, are the source of the wealth creation?

But it’s not as simple as that. To start with that extra value is not all profit. As with any business, the sales value must exceed the costs of sales in order to be profitable. Chocolate companies have had decades of practice to get this right. Barry Callebaut, a large chocolate company, reported in their latest 2019/2020 annual accounts that they made an operating profit (EBIT) of CHF491m on sales of CHF 6.9bn. That’s a margin of 7.12% and leaves little wiggle room for learning on the job as Ghana tries to build expertise that the Europeans have spent decades refining.

There are the cost-efficiencies of scale to account for as well. Barry Callebaut, Mondelēz, Olam and the other big chocolate companies have a massive operation that works to their advantage. Even if Ghana had unlimited funds, which they don’t, they will still have to go on a decade long building programme to reach the kind of scale of processing that the chocolate companies already have.

Ghana’s ambitious plan will need to take into account all the ‘soft’ elements of the business. The network of contacts, and relationships that must be made, and nurtured over time. The IT systems and logistics, currency management and treasury functions that such a large business requires. Ghana does not have that infrastructure, and it will take many years to develop it. In the interim, they will have to import those skills, if they can, at some considerable cost, to do skill transfer to a local workforce.

On the other hand, Ghana may not need to make a profit initially from operations. Job creation will be invaluable and lasting and provide stimulus to the economy. Assuming that the value of net exports increases, this will also boost Ghana’s hard currency requirements by bringing dollars back into their currency reserves.

Change Has to Happen

Politicians know that having a competent opposition is critical for ensuring a healthy dynamic for policymaking. It’s also a fundamental part of the free market and is the basis for competition law. Chocolate companies have too much power, and it’s not an environment conducive to creating good policy outcomes.

Both Ghana and Côte d’Ivoire’s well-documented acrimony with western chocolate companies, especially over the Living Income Differential (LID) is evidence of the dysfunctional market condition. It’s clear the governments have been exasperated by the ability of some companies to sidestep the LID. Farmer incomes have generally decreased in real terms as the price of cocoa itself has remained low. With inflation taken into account, farmers are worse off.

The chart below, from the Bartalks commodity page, shows the prices of cocoa over the last 10 years.

Despite all the rhetoric, the claims made by chocolate companies, and even non-profit organisations, and the annual sustainability reports and testimonials of happy farmers, the true picture for the majority of cocoa farmers in West Africa is no better than it was ten years ago.

Why Would they Bluff?

In a word. Leverage. If you closely followed the Brexit negotiations, you’ll remember the UK Prime Minister digging his heels in over a number of relatively small points. Fishing rights for example. I’m not suggesting that the right to fish off our own waters is a small matter, or not important, especially to the fisherman who make a living from it, but the contribution to GDP is tiny. So why was Johnson so adamantly determined to get a fair deal for UK’s fishing industry?

The answer, of course, was that he wasn’t, as the industry learned to their dismay when Johnson threw them under the bus later in the negotiations to get concessions elsewhere. My wife and I were watching the reporters comment on Johnson’s seemingly unreasonable position during the negotiations, and both saw it for what it was. ‘It’s a negotiation strategy, dummy!’. The posturing from Ghana appears to have, at least an element, of the same strategy – show the stick to bring them to the table.

What is the Likely Outcome?

Solutions to complex problems are rarely simple, so in reality, Ghana must develop some capacity for internal processing, both in order to meet local demand, as well as for export. The capacity will build slowly over time, and work up the value chain. This will incrementally improve the country’s leverage in negotiations, and serve to demonstrate to chocolate companies that alternatives exist. It will then be up to the chocolate companies to ensure the incentives for the producing countries to continue selling raw beans are sufficient. At least for the short to medium term.

By implementing export restrictions, they send the message that they are serious and bring the chocolate companies to the table. Ghana is still likely to develop its own internal processing capacity, but the time frame has to be measured in years to reach a meaningful level. I don’t think the big chocolate companies need to worry in the short term.

It will be interesting to read the risk section of the chocolate companies next annual reports to see if this subject is included! With everything above in consideration, looking through this lens, at a story we wrote in April about Olam and Mondelēz creating the worlds biggest sustainable cocoa farm in Seram, Indonesia, you’d be forgiven for thinking the timing of that project may not be coincidental.

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