Moneycontrol
May 04, 2012 10:45 PM IST | Source: ft.com

Ivorian uncertainty weighs on cocoa industry

As the leading cocoa traders, buyers, producers and confectioners sit down for their triennial bash at London's Grosvenor House on Friday night, they will be aware of the various uncertainties surrounding the industry.

Ivorian uncertainty weighs on cocoa industry

As the leading cocoa traders, buyers, producers and confectioners sit down for their triennial bash at London's Grosvenor House on Friday night, they will be aware of the various uncertainties surrounding the industry.


Those assembled will hear talk about the worries over real supply figures in Ghana - the second-largest producer of the commodity used to produce chocolate. They will also discuss the weather impact on the new crop. But everyone will be voicing their opinions on the industry's biggest uncertainty: Ivory Coast's new cocoa marketing system.


The west African nation, by far the largest producer of cocoa, providing more than a third of the world's output, is in the process of reforming the trading and pricing of cocoa exports, its main source of income.


Until now, exporters, including top trading houses such as Cargill, ADM, Barry Callebaut, Olam and Armajaro, have been free to buy and sell the commodity with the price dictated by the market in London. The fully liberalised system, which left farmers exposed to the international cocoa price set in London, came under the auspices of the World Bank in 1999.


The country is now reversing tack. Under President Alassane Ouattara, who came to power last year, the Ivorians have created a new regulator - Cocoa & Coffee Council - as well as initiating daily auctions to sell part of Ivory Coast's next crop, to be harvested from October 2012. Based on the auctions, the cocoa and coffee regulator will set a guaranteed price for farmers, as well as the export price of cocoa.


The Ivorian forward sales have already weighed on the cocoa market as they have come on top of forward selling by the Ghanian authorities, which have traditionally released their crop ahead of the next harvest. Ghana has for years run a state-controlled system in which the government fixes a price for farmers, guaranteeing them a stable income.


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Industry estimates of how much the Ivory Coast has auctioned since January range between 400,000 to 550,000 tonnes - just under half the Ivorian annual production of about 1.3m tonnes. "In effect, you now have two crops being forward sold at once," says one leading cocoa trader.


Apart from the price pressure, the Ivorian auctions are deemed to be going smoothly, and ahead of the cocoa dinner, the CCC gave a presentation on Thursday at the Sofitel in London on the reforms.


Mme Tour-Lits confirmed that the purchase limit for each exporter or trader in the auctions for the earlier "main crop" between October and March was 110,000 tonnes. She also noted that a "stabilisation fund" to make up for the discrepancy between the price paid to farmers and the export price would total CFA Fr70bn. The auction system will also be launched for coffee from June, she added.


She also announced that auditors PwC were conducting a study on the economics of cocoa grinding. This will help the Ivorian government's decision on controversial tax incentives for large foreign processors with cocoa grinding operations in Ivory Coast.


However, the CCC had little to offer on two key questions - maintaining quality control of the beans and the mechanism at which prices are set - issues yet to be resolved between the Ivorians and the exporters.


Those who buy cocoa from Ivory Coast currently discount the price they pay for inferior-quality beans brought in by the farmer. However, the new rules ban discounting from the price set by the CCC leaving the exporters without a means for quality control


Industry executives are also worried about how their costs and margins will be factored into the regulated pricing.


A stable source of good-quality sustainable cocoa from the world's largest producer is essential for the cocoa industry, which needs the Ivory Coast's reforms to succeed. However, industry executives are worried that the push for reforms without important details could lead to a rocky time ahead for the market.

One executive at a leading trading house warns there could be a short-term physical shortage in the market once the 2012-13 harvest starts in October unless the details are not ironed out soon. "In general people are nervous, so they will want to make sure they are not short," he says.

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