Ivory Coast and Ghana, which combined produce more than 60% of the world’s cocoa, join forcesBy Alexandra Wexler of The WSJ. Excerpts: "The West African nations of Ivory Coast and Ghana, which combined produce more than 60% of the world’s cocoa, have banded together to form their own chocolate-coated version of the Organization of the Petroleum Exporting Countries.Like OPEC, whose control over crude oil output has largely driven global oil prices since 1960, the decision by the world’s top two cocoa producers to join forces is expected to raise the cost of candy bars, ice cream and cake. The two-nation chocolate bloc has decided to charge an extra 0 per metric ton of cocoa, which is currently trading around ,500 per metric ton. “COPEC,” as some in government and industry have
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By Alexandra Wexler of The WSJ. Excerpts:
"The West African nations of Ivory Coast and Ghana, which combined produce more than 60% of the world’s cocoa, have banded together to form their own chocolate-coated version of the Organization of the Petroleum Exporting Countries.
Like OPEC, whose control over crude oil output has largely driven global oil prices since 1960, the decision by the world’s top two cocoa producers to join forces is expected to raise the cost of candy bars, ice cream and cake. The two-nation chocolate bloc has decided to charge an extra $400 per metric ton of cocoa, which is currently trading around $2,500 per metric ton.
“COPEC,” as some in government and industry have dubbed the new partnership, is already stirring confusion and unease in the $107.3 billion global chocolate market. The new premium, the second attempt to create a cartel in the cocoa market in the last 50 years, is due to take effect in October."
"Traders expect others to explore alternate sources of cocoa beans. Several smaller cocoa-producing countries are considering their own premiums, looking to the heavyweights as an example."
"Some chocolate companies have already begun buying beans with the premium attached. Most big cocoa users strike cocoa contracts months or more than a year in advance, to secure pricing for the massive quantities they need.
The $400 premium means about a 16% jump in the price of cocoa from Friday’s closing price of $2,520 a metric ton on the ICE Futures U.S. exchange, the New York market that secures future supply."
"The new premium charge “is essentially a $1.2 billion tax on the cocoa industry,” said Eric Bergman, vice president at brokerage JSG Commodities Inc."
"The world’s largest confectioners say they support Ghana and Ivory Coast’s initiative because it should help improve farmer incomes and livelihoods, increasing sustainability in the sector. Companies under increased public scrutiny over supply chains see their public support as taking a stand on a social issue."
"In the past, large multinationals have seen cocoa prices well above $3,000 a metric ton and dealt with them by making candy bars smaller, adjusting the amount of cocoa used in their products and in many instances, by raising prices."
"In Ivory Coast and Ghana, farmers generally sell cocoa beans to local middlemen at a price set each year by the government. The middlemen combine beans from many small farms and sell them in bulk to the government, which then markets to international processors. The processors turn the beans into products like cocoa powder and butter, then sell those to companies like Mars and Hershey."
"According to the World Bank, 80% of cocoa farmers, or four million people and their families, live on less than $3 a day. That statistic hasn’t shifted significantly in years. While cocoa prices go up and down on the international market, living costs for farmers have steadily risen."
"COPEC will have to succeed where other efforts to control cocoa prices have failed: From the early 1970s to the late 1980s, global cocoa supply was managed under an international commodity agreement. It attempted to regulate global prices by buying and withholding cocoa to control supply.
The cartel, made up of most cocoa-producing countries, ultimately failed due to chronic underfinancing and attempts to stabilize the cocoa price at too high a level. When the agreement was eventually suspended, prices fell nearly 40%, and remained low for years as oversupply depressed the market. Since then, there has been a shift toward futures markets to manage that type of risk.
Now, Ivory Coast and Ghana “are following an OPEC-type model,” said Cobus de Hart, an economist at NKC African Economics, a consulting firm.
Unlike the oil-pumping block, the countries would need to regulate an agricultural commodity that takes years from planting to begin producing cocoa beans, he said.
“How are you going to tell the farmers to produce less if it’s the only way they’re earning a living?” Mr. de Hart said. “Oil can stay in the ground, but it’s going to be really hard to get farmers to stop producing.”
Kip Walk, senior director of sustainability at Blommer Chocolate Co., North America’s largest cocoa processor, says the higher prices could lead farmers to dramatically expand their crop, which could see a rise of planting in protected forests or removing children from school to help harvest beans, two issues chocolate companies have been working to address.
Cocoa processors and chocolate makers say they are investing billions in programs that address sustainability issues, such as helping recruit youth to cocoa farming and teaching advanced-growing techniques to small farmers. To make up for the increase in cocoa bean prices, multinationals could cut funding from these programs established just a few years ago to avoid a global cocoa shortage, sustainability experts warn."
"Mars’s Mr. Gerbino said the company will continue to invest in its sustainability initiatives, in addition to paying the premium. Nestlé SA is spending around $45 million a year, up from about $10 million annually a decade ago."