African Cocoa Harvest Begins With Test for World's Top Producers

(Bloomberg) -- The new cocoa season kicking off this week offers an opportunity for the two biggest producers to show they’re serious about efforts to boost cooperation and exert more influence on the market.

West African neighbors Ivory Coast and Ghana, which together control about 60 percent of global cocoa output, are both expected to announce minimum prices for their farmers on Monday when the larger of two annual harvests starts. Cocoa prices, which have swung dramatically in recent years, are on pace to rise for the first year in three.

Here’s what to watch as the new season begins:

Farmer Prices

Ivory Coast and Ghana have committed to coordinate the announcement of their so-called farmgate prices as an early step toward broader collaboration. Ghana’s current price is higher and the discrepancy has encouraged smuggling and destabilized the cocoa sector, said Edward George, head of group research at Ecobank Transnational Inc.

Both countries sell their crops ahead of time to determine the farmer prices, but political and economic factors also come into play. Ghana, which kept farmers’ pay artificially high in the current season, is likely to keep its rate unchanged at the equivalent of 7,600 cedis ($1,530) per ton after global prices recovered.

African Cocoa Harvest Begins With Test for World's Top Producers

Ivory Coast is set to raise its farmer pay after the price recovery, people familiar with the matter said last week. The main-crop price will increase to between 750 CFA francs ($1.34) and 800 francs a kilogram, from 700 francs for last year’s crop, they said, asking not to be identified discussing private information. The median prediction in a survey of 9 traders, brokers, analysts and cocoa exporters was for 750 CFA francs a kilogram.

Market Balance

Crop sizes in Ivory Coast and Ghana can have far-reaching implications for the global cocoa market, which has been in surplus for the past two years. This year, however, strong demand for the chocolate ingredient is likely to more than offset another set of bumper harvests, resulting in a slight deficit of 50,000 metric tons in the season that starts Oct. 1, according to the median estimate in a Bloomberg survey of 10 traders, brokers, analysts and cocoa exporters.

African Cocoa Harvest Begins With Test for World's Top Producers

Ivory Coast will probably produce 2 million tons of cocoa next season, little changed from a year earlier, the survey showed, while Ghana’s output will come to 877,000 tons, also at similar levels to this season.

Weather

Farmers in Ghana and Ivory Coast surveyed by Bloomberg have been pleased with the recent weather, reporting a mix of rain and sunshine that’s favorable for crop development, although heavy rainfall led to floods and the prevalence of black pod disease in some areas. Growers can look forward to more rain than usual for the rest of October, Drew Lerner, President of World Weather Inc., said in a telephone interview.

African Cocoa Harvest Begins With Test for World's Top Producers

A potential El Nino, which usually brings dryness to West Africa, and the Harmattan winds from the desert this year and early 2019 are still risks for the crop, according to Rabobank International. Still, forecasts pointing to a smaller likelihood of an El Nino helped send prices down this week. The weather pattern’s “significance is debatable, with it developing this late in the season,” Lerner said. “It won’t affect the main harvest, it’s showing lackluster signs,” he said.

Financing Pressure

Traders will be keeping a close eye on the ongoing fallout from the liquidation of Saf-Cacao, one of Ivory Coast’s top cocoa exporters, which owes banks an estimated 150 billion CFA Francs.

The industry is still recovering from a crisis in 2016-17, when plunging prices caused exporters to default on thousands of tons of contracts.

Read about Ivory Coast’s efforts to limit damage from Saf-Cacao’s liquidation

African Cocoa Harvest Begins With Test for World's Top Producers

The potential losses faced by lenders to Saf-Cacao will probably result in tighter financing conditions for other participants in the cocoa sector, said Ecobank’s George. At the same time, banks no longer have a seat at the table at Ivory Coast cocoa regulator Le Conseil du Cafe-Cacao, which is shaking up its board structure to only include state and farmer representatives.

“Some of the smaller players who struggled to get financing in the past will find it even more difficult now,” said George. “Banks will look at them and say ‘do you have the same sort of problems Saf-Cacao had?’.”

©2018 Bloomberg L.P.