Ghana's cocoa production is a very streamlined operation. It is carefully managed because it is one of the most important export crops, accounting for over 8% of the country's GDP and employing over 30% of the population.
Cocoa is important to the economy for numerous reasons. Firstly, cocoa exports are one of the highest contributors to foreign exchange and, secondly, its role in poverty reduction has been proven time and time again. In terms of employment, the livelihood of about six million people depends on the crop, and numerous studies have found correlating figures between national poverty levels and periods of unfavorable prices and low yields.
In recognition of the role cocoa plays in the development of Ghana, the government in 1947 established the Ghana Cocoa Board (COCOBOD) as the main government agency responsible for the sector. Today, it is more active than ever with regular policy interventions from the government, with frequently shifting export taxes, licensing arrangements, and input subsidies. Ghana operates on a controlled marketing system, with 90% of beans produced by smallholder farms being sold at a fixed price to licensed buying companies, which in turn sell to the only authorized exporter, COCOBOD, or to domestic companies for processing. COCOBOD’s operations are largely financed through syndicated loans. In the summer of 2015, COCOBOD travelled to London to secure a $1.8 billion loan to finance the next cocoa growing season, an increase from 2014’s $1.7 billion loan.
Markets are confident COCOBOD will be able to repay their loan, which has been arranged by Barclays, Commerzbank, Deutsche Bank, Natixis, Standard Bank of South Africa, Standard Chartered, and Sumitomo Mitsui. The interest on this loan is expected to be the London interbank offered rate plus a 0.625% percentage a year.
The board had already sold 850,000 tons of beans earlier in 2015, but that was a shortfall of at least 100,000 tons, according to analyst estimates, which has left many traders in the lurch as promised shipments from the world’s second-largest cocoa producer failed to materialize. Estimates at the beginning of the year had traders pre-paying for 1 million tons of the aromatic, dark bean, leading the International Cocoa Organization (ICCO) to downgrade Ghana’s 2014-2015 projected output by 22%.
Because Ghana had oversold its crop it lost some credibility in the eyes of international traders and the subsequent loss in revenue meant a downward revision of the government’s budget for 2015. However, all that in mind, a soft-commodities analyst at Ecobank told local press that despite the shortfall, COCOBOD has bought more than enough cocoa from producers to repay last year’s loan as selling 614,5000 tons of beans would be enough to meet COCOBOD’s commitments.
The strong interest rate offered by the London delegation over the summer reflected COCOBOD’s history of reliability in meeting its payments, as well as the lack of attractive commodity deals on the continent, especially since the drop in commodity prices and uncertainty over China and related markets. After agreeing to the banks’ terms, in October 2015 the Producer Price Review Committee (PPRC) for cocoa was able to revise the producer price of cocoa for the 2015/2016 season, from GH¢5,520.00 per ton to 6,720.00, a 21.74% increase. COCOBOD and the government also agreed to give a bonus to farmers at the time of sale. Therefore, for each bag of 64kg of cocoa, the farmer shall be paid GH¢420.00 per bag plus GH¢5.00 as a bonus. The industry still faces challenges. Last year’s logistics issues, with reports of fertilizers and fungicides, distributed by COCOBOD, not reaching their respective destinations, needs to be addressed. Last year’s sharp fall in the cedi meant it was more lucrative for farmers to smuggle their cocoa rather than sell to COCOBOD, an issue that is expected to be remedied by the bonus.
In macroeconomic terms, there is a need for more support, a message heard time and time again, especially from the IMF, which in 2015 approved a $918 million loan. The unilateral message is that the government needs to work harder to improve fundamentals such as inflation, foreign exchange, revenue collection, budget deficit remediation, monetary policies, and so on. Structural weaknesses increase the likelihood of rippling through other sectors of the economy including the centrally controlled sector, cocoa. Playing possum is no longer the policy on cocoa, such a large national economic and social issue.