Abstract
Commercial transactions in the cocoa market are at prices based on the futures marker plus an origin differential. In July 2019, the governments of Côte d’Ivoire and Ghana announced a Living Income Differential (LID) of $400/ton to be paid as an additional component of the price. Analysis of realized prices for cocoa beans imported into the EU shows that, on average, the two producers obtained higher prices in the 2 years following the announcement, and that these increases exceeded both the increase in cocoa futures prices and the increase attributable to the tight physical market. The increases were shared by other origins and were passed through to higher producer prices. Origin differentials, which are determined in the broker market, subsequently declined to offset the LID. Although Côte d’Ivoire and Ghana are jointly responsible for 75% of world exports, they lack the means to limit production and are therefore unable to affect commercial transactions prices for more than a short period.
Résumé
Les transactions commerciales sur le marché du cacao se font à des prix basés sur le marché à terme plus un différentiel d'origine. En juillet 2019, les gouvernements de la Côte d’Ivoire et du Ghana ont annoncé un Revenu de Vie Différentiel (en anglais : « Living Income Differential », LID) de $400/tonne à payer en tant que composant supplémentaire du prix. L'analyse des prix réalisés sur les fèves de cacao importées dans l' UE montre qu'en moyenne, les deux producteurs ont obtenu des prix plus élevés dans les deux années suivant l'annonce, et que ces augmentations ont dépassé à la fois l'augmentation des prix à terme du cacao et l'augmentation attribuable à la tension du marché physique. Les augmentations ont été partagées par d'autres origines et ont été répercutées sur des prix producteurs plus élevés. Les différentiels d'origine, qui sont déterminés sur le marché des courtiers, ont par la suite diminué pour compenser le LID. Bien que la Côte d’Ivoire et le Ghana soient conjointement responsables de 75% des exportations mondiales de cacao, ils manquent de moyens pour limiter la production et sont donc incapables d'affecter les prix des transactions commerciales pour plus qu'une courte période.
Resumen
Las transacciones comerciales en el mercado del cacao se realizan a precios basados en el mercado de futuros más un diferencial de origen. En julio de 2019, los gobiernos de Côte d’Ivoire y Ghana anunciaron un Diferencial de Ingreso Vital (en ingles: “Living Income Differential”, LID) de $400/tonelada, a pagar como un componente adicional del precio final. El análisis de los precios realizados para los granos de cacao importados a la UE muestra que, en promedio, los dos productores obtuvieron precios más altos en los dos años siguientes al anuncio, y que estos aumentos superaron tanto el aumento en los precios de los futuros del cacao como el aumento atribuible al mercado físico ajustado. Los aumentos fueron compartidos por otros orígenes y se trasladaron a precios de productores más altos. Los diferenciales de origen, que se determinan en el mercado de corredores, posteriormente disminuyeron para compensar el LID. Aunque Côte d’Ivoire y Ghana son conjuntamente responsables del 75% de las exportaciones mundiales de cacao, carecen de los medios para limitar la producción y, por lo tanto, no pueden afectar los precios de las transacciones comerciales por más que un corto período.
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Data availability
The full dataset used in this paper is available at https://smbiena.wixsite.com/website/blank-page-4.
Notes
ICCO, Quarterly Bulletin of Cocoa Statistics, 47.4. Crop years run from October to September.
“Réaffirment leur volonté de définir une stratégie commune, en vue de trouver une solution durable à l’amélioration des prix perçus par les producteurs de cacao de leurs pays respectifs.” Déclaration d’Abidjan. https://www.gouv.ci/doc/1522158093Declaration-d-Abidjan-Cote-d-Ivoire-Ghana.pdf
The Living Income Community of Practice defines Living Income as “the net annual income required for a household in a particular place to afford a decent standard of living for all members of that household.” See https://www.living-income.com/the-concept
“Choc tactics: Ghana and Ivory Coast plot ‘Opec for cocoa’”. Financial Times, July 20, 2019.
Averaging over the three crop years 2019/20, 2020/21, and 2021/22, 54.4% of Ivorian cocoa bean exports went to the EU against 14.5% to the USA. Similarly, 52.3% of Ghanaian exports went to the EU against 10.1% to the USA. Source: ICCO, Quarterly Bulletin of Cocoa Statistics, 48.4 (December 2022). “EU” refers to the EU(27) throughout this paper.
Cocoa processing yields cocoa butter and cocoa powder in close to fixed proportion. Cocoa butter is a relatively homogeneous product and chocolate producers would be able to circumvent supply restrictions by purchasing from the fringe of independent processors. There is a greater degree of differentiation in powder products and it is possible the that the processors can raise some powder prices by exploiting unwillingness on the part of the confectionary trade to substitute between different powder qualities and specifications. See Araujo Bonjean and Brun (2016) for discussion of the product market.
Slade (1991), who examined non-ferrous metals markets, argued that futures markets increase the variability of transactions prices. A problem in making this comparison is that, in the absence of futures markets, transactions prices are often discounted in a non-transparent manner from list prices. It has also been suggested that financialization of commodity markets, led by index investors may have increased price volatility (the “Masters hypothesis”). Index allocations to cocoa futures have been very low and no-one has suggested that index investment has raised cocoa price volatility. See Masters (2008) and Irwin and Sanders (2023).
See Gilbert (2021) on premiums in the non-ferrous metals markets.
i.e., the price at the time the contract is negotiated. If a contract is negotiated in June 2022 for delivery or beans from the new crop in February 2023, it will likely be priced against the March 2023 futures contract. If the forward contract fixes the price, this will be against the June 2022 price of the March 2023 contract.
“Un prix de référence est fixé par l’organe de régulation et de stabilisation à chaque session … Toutes les soumissions doivent être au moins égales à ce prix de référence.” (CGFCC 2012).
See, for example, International Institute for Environment and Development, “An introduction to the newly implemented Living Income Differential (LID) in Ghana & Côte d’Ivoire,” August 2021. https://www.iied.org/civil-society-perspectives-living-income-differential-for-cocoa-producers
See ICCO, Quarterly Bulletin of Cocoa Statistics, Table 5.
The unit values are calculated on a calendar year basis. The ICE price averages are for the crop year commencing in the prior October. Sources: cocoa unit values—Eurostat, SITC 0721 (cocoa beans, whole or broken, raw or roasted); ICE Europe price—ICCO, Quarterly Bulletin of Statistics, Table 11; exchange rates—IMF, International Financial Statistics.
Grindings (apparent consumption) fell slightly (1.7%) in 2019/20, perhaps because of Covid, but production was also weak (down 1.1%). Grindings recovered in 2020/21 (up 5.7%) but this was in the context of a large (10.6%) rise in production. Source: ICCO, Quarterly Bulletin of Cocoa Statistics, 47–2.
It would be interesting to use the same model to ask whether the ICCO Indicator Price was affected by the LID. However, the model fit is insufficiently precise to allow such a comparison. In nominal terms, the ICCO Indicator Price rose slightly following the introduction of the LID although it fell in deflated terms. These movements have not been dramatic.
January 2004–September 2019 for the Dominican Republic. Estimation uses the Autometrics automated model selection algorithm—see Doornik (2009).
It is not possible to perform a similar analysis for imports into the USA. US customs declarations are at the so-called “customs value” which is closer to f.o.b. than c.i.f.—see Dand (1997, chapter 5) for discussion. The differences between US cocoa import unit values and the ICE New York futures price, which is a delivered (c.i.f.) price, therefore combine the origin differential and the c.i.f.-f.o.b. intermediation margin. Absent information on this margin, which can vary over time and across origins, the import unit values are not directly informative about US origin differentials.
Standard deviations calculated from the EU differentials in US dollars relative to ICE New York and deflated by the US PPI over the period 2000–19. The results are qualitatively similar using nominal euro or US dollar differentials.
The shortfall of the market differential relative to the authorized Ivorian differential is primarily a problem for independent Ivorian exporters who find it difficult to make sales earning the required price, in particular if they do not have an established reputation for quality. This is not a serious problem for the transnational exporter-processors as regard export of beans that they themselves have sourced since they contract forward with their parent and hence the déblocage price relates to an internal transfer price (which nevertheless has tax implications). In response to these difficulties for national exporters, the Ivorian government introduced a requirement for international companies to purchase at least 20% of their beans from national exporters. This has generated conflict since such purchases are unprofitable since they are at a real, above market, price and not a transfer price. See Africa Intelligence, “Power struggle between big business and Abidjan slows cocoa campaign” (16/11/22), https://www.africaintelligence.com/west-africa/2022/11/16/power-struggle-between-big-business-and-abidjan-slows-cocoa-campaign,109865219-art
On December 31, 2021, for example, Cameroonian beans comprised 37% of ICE London stocks.
The t statistic on the difference in the differentials is 3.76 rejecting the null hypothesis of no relationship at the 1% level.
Local currency prices, deflated by the local CPI. Source: ICCO (private communication) and IMF, International Financial Statistics.
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This is the revised version of a paper prepared for the International Symposium on Cocoa Research (ISCR), 5–7 December 2022, Montpellier, France. I am grateful to the referees, participants in the ISCR symposium, and to Ole Boysen, Toby Brandon, Jean-Paul Chausse and Robin Dand for discussion, and to the ICCO for information on producer prices.
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Gilbert, C.L. Cocoa: Origin Differentials and the Living Income Differential. Eur J Dev Res (2024). https://doi.org/10.1057/s41287-023-00612-x
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DOI: https://doi.org/10.1057/s41287-023-00612-x