Frontier Friday: Ghana, Ivory Coast To Withstand “Low Cocoa”
Cocoa prices remain at at a 10-year lows and will continue to put pressure on the economies and fiscal position of leading producers Ivory Coast (Côte d’Ivoire) and Ghana, both will be able to withstand short-term price fluctuations, Moody’s Investors Service said in a report issued this month. Currently, average cocoa prices reflect a drop of around 30% compared to mid-2016.
“The 30% drop in cocoa prices will put pressure on all stakeholders in the cocoa sector, but particularly Côte d’Ivoire and Ghana, through the current account, fiscal and economic channels,” said Aurelien Mali, Moody’s vice president and senior credit officer who co-authored of the report.
Although Africa produces close to 74% of global cocoa, the continent accounts for only around 20% of the grinding process. And unlike the manufacturers and traders that are concentrated within a small number of companies and enjoy higher bargaining power, farmers receive a very small share (6-7%) of the value distribution in the supply chain. Household revenue is more exposed to the volatility in prices as the agriculture sector employs about two-thirds of the population in Ivory Coast and over 40% in Ghana.
“That said, minimum farm gate prices have protected farmers in Ivory Coast from the short-term fluctuation in prices, while Ghana’s burgeoning oil sector will help to offset the impact on its credit profile,” Mali wrote in a note to clients.
The impact of the cocoa price fall on the current account balance will be more significant for Ivory Coast than Ghana because cocoa exports accounted for around 43% of its total merchandise exports in 2015, compared to 24% in Ghana.
For Ivory Coast, the agency expects lower cocoa prices coupled with higher investment-related imports will increase the current account deficit to
2.7% of GDP in 2017, from 0.6% in 2016 and compared to a surplus of 0.7% over 2014-15. Lower exports will also weigh on growth.
In Ghana, Moody’s now expects the current account deficit to improve to 6.3% of GDP in 2017 from 6.6% in 2016, amid higher GDP growth supported by new oil and gas field developments in the country.
Longer-term, growing demand for chocolate in developing markets suggests that low prices – although still possible – are unlikely to persist for many years.
Switzerland, the United Kingdom, United States and Germany still remain the top chocolate consumers and these markets are already fully penetrated.
On a per capita basis, Switzerland annually consumes around 9.2 kg of chocolate, and the average western European consumes 4.7 kg, while consumption for China and India only stands at around 0.1 kg. This “indicates further potential for cocoa production to meet growing demand over time as those markets are likely to deepen.”