Is it time for cocoa farmers to be paid in US$? (I)

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Cocoa value-chain remains critical to economy – UMB Boss

On the 1st of October 2021, Ghana Cocoa Board announced through a press release that Ghana had maintained the 2020/21 producer price of cocoa as the producer price for the 2021/22 crop. Ghana’s producer price of cocoa beans per metric tonne for 2020/21 (i.e., Gh¢10,560) was a combination of the 2019/20 producer price of GH¢8,240 and the 2020/2021 Living income differential (LID) levy of GH¢2,320.

Without stating the forecasted price at which they will be selling cocoa beans to their buyers, Cocobod said that the Gh¢10,560 producer price per metric tonne for the 2021/2022 crop year forms ‘87.15%’ of the world market price. As questionable as I found it, I dug for data to calculate the actual producer price as a percentage of the world market price to confirm if Cocobod’s rate was correct.

In this article, I will be demonstrating the actual producer price as a percentage of the world market price so you can judge for yourself if Cocobod has been providing the public with false information about cocoa farmers’ income and the portion of the world market price that gets into the pocket of cocoa farmers.

Secondly, I will highlight how at the point of increased cocoa prices, depreciation of the Ghana cedi and increased inflation in consecutive crop years, cocoa farmers still experienced no increase in their producer price, worsening their economic and social well-being. I will conclude by advising that Cocoa Farmers need to be paid in US$ to insure them against the livelihoods challenges that emanate from our cedi depreciation and our high inflation rates.

I recommend that cocoa farmers lead the negotiation of the percentage of the world market price in US$ that needs to be paid to them as farmgate price, as opposed to the cocoa producer price committee deciding how much cocoa farmers should be paid. As usual, Ghana Cocoa Board would be on the opposing side to this until we put relentless pressure to force them beyond comprehension to change. We have professionalised a corrupt system against the people Ghana Cocoa Board was instituted to protect.

Various Terminologies to understand

  • Producer price/farmgate price: This is the actual price set at the beginning of the crop year (Every Oct) in Ghana cedi, at which cocoa beans would be purchased from Cocoa Farmers. So, this qualifies as the income Cocoa farmers gain from their cocoa trade. 
  • World market price: This is a changing daily price of cocoa beans in the international market in dollars, perpetuated by demand and supply. That is the average price at which Ghana Cocoa Board sells Ghanaian cocoa beans to buyers. In this article, we will be using the International Cocoa Organisation (ICCO) average prices as presented by Ghana Cocoa Board. 
  • Forex exchange rate: This is the rate at which one currency can be valued in another currency’s terms. So in this article, we will be valuing the US$ in Ghana cedi terms. We will be using data from the International Monetary Fund. 
  • Crop year: The crop year in the cocoa sector is the cocoa production cycle which begins in October and ends in September. The annual averages in this article are consistent with the crop year cycle (October to September).
  • Syndicated loans: These are money borrowed by the Ghana Cocoa Board in US$ from bankers to finance the purchasing of Cocoa beans from Ghanaian cocoa farmers. 
  • Living income differential (LID): This is the newly agreed US$400 per metric Tonne levy that is paid by buyers of Cocoa beans from Ghana and the Ivory Coast as a token to help improve the livelihoods of cocoa farmers.

The misrepresentation of the Ghanaian Cocoa Producer Price as a % of the world market price

Ghana regulates the cocoa sector through its regulator, Ghana Cocoa Board (Cocobod). Cocobod, through its Licensed Buying Companies (LBCs), procures Cocoa beans from farmers at a commission. Cocobod announces the producer price, determined by the Producer Price Review Committee on Cocoa, for each crop year in Ghana cedi. As one would think that cocoa farmers would get the total price of their cocoa beans sold in the international market like any regular business, they only receive a percentage of it as a producer price.

The rest are retained with Cocobod to provide ‘support services’ for the farmers. Due to this arrangement, producing countries like Ghana demonstrate their commitment to improving smallholder cocoa farmers’ economic well-being using the ‘producer price as a percentage of the world market price’. As announced at the beginning of the 2021/22 crop year, Cocobod claimed that the producer price for the 2021/22 crop year was 87.15% of a world market price – unknown to cocoa farmers. So this caused us to investigate precisely the percentage of the world market price given to cocoa farmers as a producer price and what is retained by Cocobod.

Logically calculating the producer price as a percentage of the world market price should be as easy as (producer price/world market price * 100). However, with the producer price being paid in Ghana cedi and the cocoa beans being sold in US dollars, the US dollar to Ghana cedi rate becomes a variable that needs consideration when calculating the world market price percentage awarded to farmers’ farmgate price.

The information on the average exchange rate at which Cocobod sold each crop year’s cocoa beans is not made known to the public, hence making it difficult for farmers to calculate precisely how much of the world market price in Ghana cedi terms they received as a producer price since the producer price is in Ghana cedi. Also, because the producer price is set at the beginning of the year, it remains static and doesn’t change daily, weekly, or monthly to reflect the actual fluctuations in the forex rate. Even though we understand that Cocobod sells cocoa beans using its forward sales strategy, a global oversupply of cocoa beans means that they cannot trade all the cocoa beans at a go at the beginning of the crop year.

Also, cocoa beans are produced throughout the crop year, not just at the beginning. This means that they have the chance throughout the year to correct their exchange rate forecast to reflect the actual forex changes to ensure they mitigate their forex risks. But the question is, is the cocoa farmer paid any extra income at the end of the crop year to reflect the upward changes in the exchange rates? I am sure the economist will argue that if the cedi performs better than the US$, will you be willing for cocoa farmers to be paid less? The answer is yes. Cocoa farmers are not competing with Ghana Cocoa Board to see who can swindle each other.

Ghana Cocoa Board is supposed to be selling the beans on behalf of farmers; hence if the world market price is high, the farmer should benefit, and if it’s low, they should deal with it. This is how business is. What happens to farmers, to those on the side of “if the Ghana cedi appreciates against the dollar”? Historically, the Ghana cedi hasn’t outperformed the US$ in any way for us even to assume that the farmers will be disproportionately affected if they are made to face the daily changing exchange rates. In fact, between February 1992 to February 2022 (30 years), the value of the one dollar against one Ghana cedi appreciated from 0.0342 to 6.7. In percentage terms, the Gh¢ has depreciated against the US$ by 19,490% within the last 30 years.

This means that over the past 30 years, the US$ has appreciated against the Ghana cedi at an annual estimated rate of 20%. So first, on an annualised basis, the US$ appreciation can counterbalance the effects of Ghana’s inflation and improve cocoa farmers’ real income. So, there is a net economic benefit to the smallholder cocoa farmers if their producer price is made to reflect the changing exchange rate at which the cocoa beans can be traded to ensure that the farmers have quality remuneration. Of course, this will work when Ghana Cocoa Board agrees to pay the farmers a % of the US$ value of the cocoa beans’ sales.

In the graphs below, I used data collected from the Ghana Cocoa Board and the IMF to demonstrate the percentage of the world market price given to cocoa farmers as a producer price. I also used the graphs to illustrate how even when the world market price of cocoa beans and the exchange rate depreciation increased, cocoa farmers’ producer prices never changed; hence, cocoa farmers received less value than what they deserved. Also, their income is further devalued with high inflation leading to endemic poverty and poor livelihood experiences.

Graph 1: GHANA’S ACTUAL PRODUCER PRICE/MT AS A PERCENTAGE OF THE WORLD MARKET PRICE OF COCOA BEANS FROM  2008/09 TO 2020/21

 


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‘A cocoa farmer’s son’

Kwame is a cocoa farmer’s son with expertise in international trade & policy, industrial policy, and project management, with a professional focus on the Cocoa-Chocolate Industry, the smallholder cocoa farmer and the digital economy.

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