Defaults and Poor Data, Cocoa Audit Shows Top Grower's Woes

(Bloomberg) -- Ivory Coast’s cocoa regulator failed to prevent a crisis that sent prices plummeting last season, according to an audit of the world’s top producer by KPMG LLP.

Offering a rare glimpse into the workings of an opaque industry, KPMG shows how flaws in the West African nation’s sales system had a “catalyst effect” on the industry’s woes, according to a copy of the audit commissioned by the government and obtained by Bloomberg. The crisis cost the country at least 185 billion CFA Francs ($333 million) in lost income, KPMG said.

Read more: Ivory Coast plays blame game for cocoa crisis

While reforms of the sector in 2012 were supposed to protect cocoa farmers from global swings, the last annual season that ended in September showed producers remained vulnerable. Prices started tumbling amid forecasts for an oversupply, triggering a wave of defaults by local exporters that couldn’t fulfill their contracts because they had bet on higher prices.

A slow response from Ivory Coast deepened the rout and resulted in farmer pay being cut by more than a third.

KPMG and Yves Brahima Kone, head of the regulator known as Le Conseil du Cafe-Cacao, declined to comment.

These are the report’s main findings and recommendations:

1. Defaults

After prices reached a six-year high in July 2016, local shippers who speculated on further gains were caught wrong-footed. The audit showed 32 exporters defaulted on 222,302 metric tons of cocoa, about a fifth of sales usually made ahead of the start of the season. Smaller exporters from groups known as Pmex and Coopex accounted for 68 percent of the unfulfilled contracts.

The defaults forced Ivory Coast to reauction beans, putting further pressure on prices. The CCC allowed some defaulting companies to continue making purchases, raising the risk for the current season, KPMG said.

The biggest defaulters during last season were Nocoacy with contracts for 35,975 tons, Saf Cacao with 15,000 tons and 2CICS SA with 14,900 tons, according to the report. Saf Cacao had also defaulted on 7,425 tons in the 2015-16 harvest, it said.

Pro Bi Irie, head of Nocoacy, declined to comment when contacted by phone. Saf Cacao’s Chief Executive Officer Ali Lakiss said he wasn’t aware of the report and couldn’t comment. A call to the office of 2CICS SA in the port city of San Pedro went unanswered while a person at the company’s office in the commercial capital, Abidjan, said Friday the managers were away.

The CCC lacks a system to monitor the financial health of local exporters and should cut the number of permits to 50 from 128, KPMG said. This season, the number of exporters was reduced to 90, according to the CCC.

2. Crop Estimates

Ivory Coast needs to improve crop forecasting after years of underestimating the bigger harvest that runs from October to March, according to the report. The margin of error for last season was 17 percent.

The forecasts are important because the regulator auctions 80 percent of the crop before the season starts. The proceeds are then used as a basis to set the minimum prices for farmers. Any additional sales at a lower price could leave the regulator at a loss.

Last season, the CCC calculated the producer price on a main crop similar to the previous three years of 1.2 million tons, instead of using its September 2016 forecast of 1.334 million tons, resulting in additional costs, the audit showed.

The regulator also started sales for the smaller harvest later than usual, KPMG said. That gave it less time and put further pressure on prices. In total, the CCC held 866 auctions for last season’s crop, more than 70 fewer than in each of the past two seasons. It also put up for sale as much as 100,000 tons at one time, more than double the maximum amount the previous two seasons, according to the report.

3. International Contracts

KPMG said the way the regulator allocates international contracts, bought by foreign companies and shipped by local exporters, needs to be better explained.

Local exporter Africa Sourcing handled 165,000 tons of cocoa in the three years through September, the equivalent of about 40 percent of international contracts. The company with the next biggest share had 9.8 percent of the deals, the report showed.

Africa Sourcing, which is linked to First Lady Dominique Ouattara’s son, Loic Folloroux, didn’t default on any contracts. Its contracts represent about 10 percent of all deals shipped by members of Pmex and Coopex over the three years, according to the report.

Africa Sourcing’s share represented 9.3 percent of all contracts obtained by Ivorian shippers, according to an email from their attorney, Iskander Fernandez. Since the company only handled international contracts, its total is only a fraction of the 6.1 million tons sold in all auctions.

Folloroux declined to comment when contacted by phone. Africa Sourcing Director General Ismael Kone didn’t respond to emailed queries.

The regulator has changed more than once its rules on the allocation of international contracts. While foreign companies now choose a local shipper and request the CCC’s approval for the deal, there were times in the past when the regulator alone made the decision.

4. Other Highlights

  • The crisis reduced Ivory Coast’s stabilization fund by about 197 billion CFA francs, while a separate reserve fund was left untouched.
  • Ivory Coast needs to rethink the participation of small Ivorian exporters that are part of Pmex and Coopex in forward sales, KPMG said, adding that they would be better suited for spot sales. This would significantly reduce the risk of defaults, it said.

©2018 Bloomberg L.P.

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