INTERNATIONAL cocoa buyers have made more than half a billion dollars in upfront payments to Ghana’s state-run marketing board, Cocobod, as part of efforts to secure supplies and avert further financial losses. This follows an abrupt overhaul of the country’s cocoa marketing system, which now relies more heavily on private traders to finance and manage the crop, amidst declining production and rising financial challenges.
The shake-up marks a major departure from the three-decade-old system where Cocobod would traditionally take out bank loans to buy cocoa from farmers and then forward-sell contracts to international companies. The new model is seen as a necessary adaptation, but it raises significant risks for private players, traders, and even the global chocolate industry.
‘We’ve become dependent on private players to manage everything,’ one small trader operating in Ghana, told Reuters, adding that the new system has shifted much of the responsibility onto traders, who must now pre-finance the purchases.
The change in marketing comes after Cocobod’s financial struggles, compounded by declining cocoa output. For the first time since 1992, the board did not secure syndicated financing to purchase cocoa for the 2024 season, instead shifting the burden to the international companies themselves. This has sparked concerns over the long-term viability of the sector and the ability to meet future cocoa contracts.
‘This is a very high-risk strategy,’ said a cocoa fund manager told Reuters. ‘If the production forecast doesn’t materialise, we could be in serious trouble.’
Cocobod claims the shift will reduce costs, with estimates suggesting that it could save around $150 million in interest payments. However, some traders fear that while the new system works in the short term, its long-term sustainability remains uncertain.
Financial strain and losses
Despite the upfront payments, the sector is grappling with the fallout from failed harvests in both Ghana and neighbouring Cote d’Ivoire, which sent cocoa prices to record highs in April. The board also found itself unable to meet contracts due to overselling the crop. Traders are now owed up to 350,000 metric tonnes of cocoa from last season, at an estimated cost of $1bn in futures market hedges.
‘They’ve oversold and now we’re left to pick up the pieces,’ said one trader, who requested anonymity due to the sensitivity of the issue. ‘The losses from last season are already substantial, and it’s unclear how much more we’ll have to write off.’
Cocobod has acknowledged these unfulfilled contracts, pledging to honour them this season. However, the situation remains tense, with companies now required to purchase additional cocoa at near-record prices to balance out the price discrepancies.
‘It’s a tough situation,’ said the head of cocoa for one major trading house. ‘We know how much we’ve lost, but we don’t know how much more we’ll lose if the harvest isn’t strong.’
Risk of a poor harvest and market uncertainty
The shift in the marketing model comes amid significant uncertainty regarding crop yields for the 2024 season. Cocobod’s own production estimate stands at 650,000 tonnes, but many in the industry believe this figure is overly optimistic, with analysts suggesting that the real figure could fall well short.
‘The gap to fill is huge,’ said Tedd George, an Africa-focused commodities expert. ‘To cover all of the unfulfilled contracts, the harvest would need to be at least 900,000 tonnes, which is 250,000 tonnes more than the current estimate.’
If the crop fails to meet expectations, many smaller traders and local processors could be left without supplies, with some fearing that Ghana may yet again roll over contracts into the next season.
Growing concerns over the future
‘The financial risks are enormous,’ another trader noted. ‘If the beans run out, we’re in trouble, and the consequences could be far-reaching for Ghana’s cocoa sector.’
For now, Cocobod remains optimistic, stating that farmers are being paid and the marketing system is functioning well. However, some smaller traders are expressing concerns that the system disproportionately favours larger players with more established supply chains, leaving smaller operators exposed to greater risks.
‘Small traders are bearing the brunt of this,’ said a regional cocoa trader. ‘The new model puts them at a disadvantage, as they have to pay upfront for beans they might not even get.’
What lies ahead for Ghana’s cocoa industry?
Despite these challenges, the cocoa sector in Ghana remains a vital part of the country’s economy. In 2023, it contributed significantly to export revenues and employment, with the country being the second-largest cocoa producer in the world.
However, industry insiders warn that the risks associated with the new marketing model could threaten the long-term stability of the cocoa sector. If the production targets are not met or if further financial mismanagement occurs, Ghana may face even greater difficulties in maintaining its position as a key player in the global cocoa market.
‘Chocolate manufacturers are starting to build alternatives to reduce their dependence on Ghana,’ said a small trader. ‘If the risks keep rising, more buyers may look elsewhere.’
With cocoa prices continuing to climb and uncertainty around Ghana’s production levels, the country’s cocoa industry is facing a pivotal moment. The next few seasons will determine whether the new marketing model proves successful or whether the risks become too great for traders to bear.
