Industry players in Ghana are optimistic about prospects for a cocoa turnaround

Cocoa has traditionally accounted for a significant proportion of Ghana’s GDP, and while other commodities like gold and oil now bring in more money, cocoa remains a key contributor to rural development. According to the Ghana Investment Promotion Centre (GIPC), agriculture contributes around 40% of Ghana’s export earnings, with cocoa accounting for the largest part of this, providing up to 75% of agricultural export earnings. The country grossed around $1.9bn from exports of cocoa and its derivatives in the first nine months of 2014, according to local media. Ghana is the world’s second-largest producer of cocoa behind neighbouring Côte d’Ivoire, and the government estimates that around 800,000 families live at least in part from cocoa farming. According to some estimates, up to 3m people in Ghana are directly and indirect employed by the cocoa industry.

The industry has benefitted from large-scale programmes targeting improved productivity, including the rollout of hybrid seedling programmes and technical assistance. However, a disappointing 2014/15 season, following poor weather and an outbreak of fungal black pod disease, has left the industry struggling to fulfil its sales contracts. Moreover, the depreciation of the cedi has raised concerns about a rise in cocoa smuggling across the border with Côte d’Ivoire, where cocoa producers are able to get higher prices for their produce. The industry is also dealing with a rapidly ageing population of farmers.

Difficult Season

Following the successes of the last few years, the 2014/15 season has been disappointing for Ghana’s cocoa industry. In May 2015, Reuters reported that a poor cocoa harvest had made it increasingly difficult for the country to fulfil its sales contracts. Forecasts from May 2015 suggested that the crop for the 2014/15 season was unlikely to exceed 700,000 tonnes, far below the initial estimate of more than 1m tonnes. The country produced around 900,000 tonnes of cocoa in 2013/14, and the Ghana Cocoa Board ( COCOBOD), the government body charged with facilitating the production, processing and marketing of cocoa, had thought that the 2014/15 season could surpass this. Conversely, the country produced nearly 1m tonnes in the 2011/12 season, more than Côte d’Ivoire, whose farmers were struggling to recover from the fallout of the violence that followed the country’s 2011 post-electoral violence.

Heavy rainfall between August and October 2014 coupled with an unusually harsh harmattan, a dry desert wind that blows in from the Sahara Desert during the winter, had an negative effect on crops. In December 2014 the central and northern areas of the country received only 10% of their normal rainfall for that time of year, while fungal black pod disease caused further damage. “The challenge right now is with production, where in the past it was logistics and infrastructure. We have witnessed very low production levels this season,” Nana Amo Adade Boamah, managing director of Cocoa Merchants Company, told OBG. As much of Ghana’s cocoa is pre-sold through the commodity futures markets, there could be a shortfall of up to 200,000 tonnes in 2015, with contracts rolled over to the 2015/16 season.

Cocoa Industry

The cocoa year in Ghana is divided into two distinct periods, with the main season made up of the 33 weeks between October and June, and the lighter, mid-crop season during the shorter summer months. The mid-crop season generally accounts for 15% to 20% of the total annual harvest. The six main cocoa growing regions in Ghana are the Ashanti, Brong Ahafo, Eastern, Volta, Central and Western Regions. The Western Region, bordering Côte d’Ivoire, is responsible for more than half of overall national cocoa output, with production dominated across Ghana by small family-run farms on plots of less than 3 ha.

The farmers sell their cocoa to 26 licensed buyers, who then, after fixing a price, resell to COCOBOD, the government entity authorised to export cocoa from Ghana. COCOBOD has the sole responsibility of exporting the cocoa beans, while also selling light crop beans to local processing companies. In addition, a handful of multinationals operate small dark crop facilities.

Shifting Exports

Cocoa exports have historically gone from Ghana to Europe, but this is shifting, with 19.9% of cocoa exports going to Asia in the 2012/13 season, mainly to China, Malaysia and Japan. Between 2008 and 2011 China grew from the 12th to the ninth-largest importer of cocoa paste and from the 15th- to ninth-largest importer of cocoa powder and cake, according to the World Cocoa Foundation. It remains a key potential growth market. Prices for raw cocoa in Ghana have risen steadily over the years, with the producer price set by COCOBOD going from GHS3392 ($941) to GHS5520 ($1530) per tonne for the 2014/15 season, an increase of 62.74% yearon-year (y-o-y). In October 2014 the cocoa price in Ghana was set at GHS345 ($95.70) per 64-kg bag, with an additional bonus of GHS5 ($1.39) per bag paid to the producer at the time of sale.

In September 2014 COCOBOD signed a $1.7bn loan with a consortium of international banks to finance purchases for the 2014/15 season, up from $1.2bn for the 2013/14 season. Since the 1992/93 season COCOBOD has obtained receivables-backed loans to help ensure timely payments for cocoa producers. A new loan deal was signed in September 2015 for a $1.8bn infusion with international banks to finance purchases for the 2015/16 season. The loan was oversubscribed by 44%, with COCOBOD taking only the $1.8bn originally planned at 1.19% over 11 months. Meanwhile, later that month, Ghana launched investor meetings in Europe and the US, with a view to launching a $1bn dollar-denominated bond and possibly a second issue of up to $500m, later in 2015.

Opportunities

Despite a difficult 2014/15 season, the cocoa industry in Ghana retains a fundamentally strong outlook due to high global demand. In its annual results in late 2014, Barry Callebaut, the world’s largest chocolate manufacturer, said that it had sold 1.72m tonnes of chocolate in the year up to August 31, an 11.8% increase y-o-y. Overall, global cocoa consumption rose on average 3% every year between 2008 and 2012, according to the World Cocoa Foundation, with some now estimating a cocoa deficit of around 1m tonnes by 2020, potentially rising to 2m tonnes by 2030.

Chocolate consumption is also on the rise in sub-Saharan Africa, with sales of chocolate in South Africa growing from R5.8bn ($501m) in 2013 to R6.4bn ($553m) in 2014, according to market research company Nielsen, which could open more markets for Ghana’s cocoa growers.

Policy

Ghana’s government, through COCOBOD, has initiated measures to increase cocoa yields and encourage young Ghanaians to take up farming. In April 2015 COCOBOD started to distribute 50m hybrid cocoa seedlings to farmers across the country free of charge as part of an effort to increase Ghana’s cocoa output to 1.5m tonnes a year (a similar initiative in the 2010/11 cocoa season saw the government hand out 20m free seedlings).

The new hybrid seedlings are said to be more resistant to pests and diseases, including black pod disease, and can withstand harsher weather. The seedlings are also expected to have a greater yield. “Currently, the crops we have in the farms have an average yield level of about 450 to 500 kg per ha. However, with the new seedlings that we are giving out free of charge, the yield level is between 1000 and 1500 kg per ha,” Isaac Yaw Opoku, executive director of the Seed Production Unit of COCOBOD, told local media at the launch of the initiative. Cocoa farmers are also benefitting from the government’s continued fertiliser subsidy, and will benefit from an improved road network once the $450m road rehabilitation package the government announced in 2014 is completed.

Smuggling

The steep drop in the value of the cedi in 2014, which declined by 31.2% over the year according to the Bank of Ghana, reversed the illegal flow of cocoa across the border between Ghana and Côte d’Ivoire, which traditionally passed from Côte d’Ivoire to Ghana, where prices were generally higher. According to media reports, smugglers trafficked around 40,000 tonnes of Ghanaian cocoa beans to Côte d’Ivoire between November 2014 and early February 2015, with a view to taking advantage of higher prices there.

“Smuggling is not something that we can quantify, but it is one of the biggest problems,” Godfried Oduro-Baah, a research manager at COCOBOD, told OBG. “The prices differ so much that people are encouraged to smuggle. We are trying to make sure the prices are at least on a par, but we still have a little problem with that.”

Value Chain

Despite its position as one of the world’s largest cocoa producers, Ghana has had difficulty moving up the value chain into cocoa processing, with bulk raw cocoa beans still accounting for about 80% of the industry’s exports. “There is a big opportunity here. We are processing just 20-30%, with the rest exported raw,” Richard Adjei, the principal investment promotion officer at the Ghana Investment Promotion Centre (GIPC), told OBG. The government had targeted 50% local processing by 2015, according to Adjei, but he admits that it will not hit that number. “Unfortunately, we are going to miss the target of 50%.”

In April 2015 the Cocoa Touton Processing Company, a subsidiary of France’s Touton Group, inaugurated a cocoa bean processing factory in Tema. The facility, which it had purchased from Niche Cocoa Industry, will have an initial capacity of 25,000 tonnes, with that number set to rise to around 37,000 tonnes over the next five years.

Although Ghana’s cocoa industry is expected to recover from a disappointing 2014/15 season, challenges such as the ageing population of cocoa farmers and an over-reliance on the low end of the industry must be addressed to ensure the sector’s continued growth potential in the long term. Even so, cocoa continues to play a key role in Ghana’s economy and if the country can find a way to move up the value chain and entice a younger population to take up farming, then there will be real opportunities for the industry to push forward.