Monday October 05, 2020, / 8:49 AM / By Proshare Research / Header Image Credit: Waystocap
In July 2019, Ghana and Ivory Coast- the world's top two cocoa producers joined forces to impose a floor price for cocoa of $2600 per tonne and a Living Income Differential of $400 per tonne. This is a price Chocolate companies must pay if they want to access their more than 60% share of global supply.
Through this partnership, their sales policies will be harmonised to have greater impact and also increase their earnings.
Chart 1: Cocoa Price January 2020 - September 2020
In September 2020, the cartel reached a decision to raise the fixed farmgate price by 21% for the main crop of the 2020/2021 season starting October 1st, 2020. This increment is to tackle poverty among farmers and ensure better pay to producers.
How Should Nigeria Respond?
Cocoa was a major agricultural export crop and a top foreign exchange earner in the 1950s and 60s. Prior to the discovery of crude oil in commercial quantities in the 1970s, Nigeria was the world's second largest producer of cocoa.
Today, Nigeria currently ranks the fourth largest cocoa producing country in the world.
With total output of approximately 300,ooo tonnes, the country is behind Ivory Coast(2 million tonnes), Ghana (883,652tonnes) and Indonesia (659,776tonnes).
For African Economy, the price hike will ensure these two countries maximize their revenues from the $100bn global Chocolate Industries earnings.
It will also serve as an encouragement to the farmers as they walk away from a life of backbreaking labour with little reward.
For Nigeria, where Cocoa is its largest Agricultural export commodity, accounting for 1.46% of total exports and 41.38% of total agricultural exports as of Q2'20 will be unable to taste the success in the price hike as its Cocoa Sector suffers from deregulation, poor financing and infrastructure.
If You Can't Beat Them, Then Join Them
At 300,000 tonnes output, local demand cannot be met, Companies such as Nestle and Cadbury, so as to meet up with their own production, had to resort to importation of these beans, which basically should have been sourced locally to increase Governments Income.
The price hike by the world's top two cocoa producers serves as a tailwind towards improving and increasing cocoa market revenue.
Nigeria, who is the fourth largest producer in the world should consider joining the cartel and this is why;
Falling Oil Price
Chart 2: Brent Price January 2020 - September 2020
As of October 3rd 2020, Brent Crude was trading at $39.27/bbl by 1:26pm (Nigerian time). The dwindling Oil prices continues to eat deep into the Government Revenues, and this seems like the perfect time for the Government to increase their exposure to the agricultural sector by joining hands with their African Counterparts, so as to increase their export earnings from the meagre output.
Price Setting and Research
The two West African Nations created a joint body to improve coordination in research, price setting and the fight against child labour.
Immoderate rainfall and possible outbreak of the black pod disease is set to wipe out up to 40% of its cocoa output in the 2020-21 harvest season. With Nigeria under-producing already, this is likely going to affect its export earnings from cocoa and by partnering with these two countries, Nigeria will be able to supply this commodity at a market price favourable to the producers preventing under-selling.
By joining the cartel, Nigeria will enliven their long-neglected Cocoa Research Facilities and team up with the cartel to find the best way to tackle Africa's top cocoa disease- the Black Pod Disease.
China Cocoa Trading Centre
In August 2020, Central China's Hunan Province opened a Cocoa Trading Centre to join Africa, the World's leading cocoa producer, to China's fast-growing appetite for Chocolate. This Marketing Centre, established in Changsha, the Capital of Hunan will start by selling cocoa mainly from Ghana before bringing in products from other parts of Africa.
Nigeria should advantage of this new cocoa market in China, by teaming up with these two top producers, they ensure their cocoa enters the china market with the optimum price agreed by the cartel, thereby increasing its export earnings.