Who wins when cocoa's price rises? (Part II)

Photo: COCOBOD quality control officer grading cocoa in Ghana; photo by Kristy LeissleBy Dr. Kristy LeissleLast week, I wrote about the people and companies that lose out (or have a questionable outcome) when cocoa’s price rises, as it did during the first quarter of 2018. This week, I tackle the question that prompted me to write this pair of posts: Who wins when cocoa’s price goes up?Let’s start with one that is better protected than others: Ghana’s government. Ghana is the second largest cocoa producing country and its cocoa is the gold standard for bulk bean quality. This is because the government has maintained strong regulation of the cocoa sector. Ghana’s Cocoa Board, usually referred to as COCOBOD, sets a producer price at the start of the main crop season. That price is paid to all farmers for the whole season, which runs from October through May. COCOBOD also controls exports—only its marketing arm can sell Ghana cocoa to international buyers (apart from a few small exceptions, such as Fairtrade-certified cocoa).COCOBOD sets the producer price based, in part, on the world market price at that time. If that price rises mid-season (as it did this year), then Ghana’s government usually keeps producer price the same, but exports the cocoa for more than it had planned (although Ghana forward sells up to 70% of its crop before the season starts, at undisclosed prices, so we can’t really know how much it stands to gain from a mid-season price rise). If cocoa’s price rises, COCOBOD often will share the revenue surplus with farmers as a bonus. It has even, on occasion, raised the producer price mid-season. But Ghana’s government still stands to win if cocoa’s price rises after the season price is set.The reverse is also true: if cocoa’s price falls, then COCOBOD generally does not reduce producer price. This happened in 2016/17: cocoa’s world market price lost 30% of its value, but COCOBOD kept producer price constant. As Lauren pointed out when we were discussing this post, this is similar to what big companies do when they hedge on the futures market: Ghana’s Cocoa Board reduces price risk for farmers by setting the price in advance of the season, and promising to pay that price for the duration.Most smallholders outside of Ghana, however, sell their cocoa without a set—and enforced—government price. In these cases, the evidence suggests, farm gate prices follow world market price. This means that smallholders may win when cocoa’s price rises, because they receive more for their crop.However, there are a thousand reasons why smallholders might not feel like “winners” even when farm gate price rises. The same risk applies to them as to Ghana’s government: when cocoa’s price falls, they earn less. Moreover, knowing what cocoa’s price is doing doesn’t tell us anything about other prices that impact farmers. If cocoa’s price rises, but the price of oil does too, then a smallholder may be earning more for cocoa, but paying more to transport it to market. In this scenario, any cocoa “win” may be diminished by higher fuel costs.If we take a wider angle, we can see another reason to consider a price rise as a qualified win for smallholders. When cocoa’s price stays high, farmers historically plant more of it. This means supply eventually goes up; when it does, price falls. While smallholders may benefit in the short term from cocoa’s price rising, in the long term, that very rise may end up costing them.Plantation owners and large landowners who lease plots to tenant farmers or sharecroppers are clearer winners. These groups may have healthier margins than smallholders, due to the volumes they sell. Moreover, such people typically have more socioeconomic power than smallholders. A plantation owner who profits from a cocoa price rise might pay workers the same regardless. Thanks to their power and relative wealth, this category has one of the easier wins.What about middlemen? This catchall term describes anyone who operates between farm gate and port of export (or all the way to consumers). Sometimes, as in Ghana, these are licensed buyers. Others are agents for companies that process or export cocoa. Some are informal traders who buy cocoa in addition to other things. Regardless, middlemen usually have a bit of power.This is for two reasons. First, they do a job that not many would choose: traveling into the bush to buy and transport heavy bags of cocoa, on terrible roads, facing the dangers of carrying cash in cash-strapped places. The industry needs these people for cocoa to move. Second, middlemen (and all the ones I’ve met are men) deal with the most vulnerable people in the supply chain—smallholders—and the sourcing companies, processors, and exporters that can be expected to pay according to world market price. When cocoa’s price rises, middlemen can (at least for a while) squeeze both ends: pay low to farmers, demand high from buyers. Rarely is there so little competition that middlemen can pay whatever they please, and they do not have a free-for-all. But they can win from a price rise in ways others cannot.I’ll close with the opposite question: Who wins and who loses when cocoa’s price goes down? This answer comes more easily. The losers are almost everybody: smallholders, plantation owners, national economies, governments. Ivory Coast lost in early 2017, when cocoa’s price fell by 30% and exporters defaulted on their contracts.And big chocolate companies? When cocoa’s price goes down, they win.-------------------------Dr. Kristy Leissle is a scholar of cocoa and chocolate. Since 2004, her work has investigated the politics, economics, and cultures of these industries, focusing on West African political economy and trade, the US craft market, and the complex meanings produced and consumed through chocolate marketing and advertising. Her recent book, Cocoa (Cambridge: Polity, 2018) explores cocoa geopolitics and personal politics. Dr. Leissle is Affiliate Faculty in African Studies at the University of Washington; Research Associate for the development through trade organization Twin & Twin Trading; and Cultural Specialist for National Geographic-Lindblad Expeditions. Among other previous roles, she served as the Director of Education for the Northwest Chocolate Festival from 2010-2013. She lives in Accra, Ghana.