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The Independent Voice of the Commodity Industry
November ’17 Editorial comment: Buffer stocks could be a bulwark against starvation

November ’17 Editorial comment: Buffer stocks could be a bulwark against starvation

This Editorial comment  first appeared in the November 17 issue of C&CI, click on subscribe now if you wish to read more informative articles in the November and future issues of C&CI.

The response to plans from the world’s largest cocoa producing nations – Côte d’Ivoire and Ghana – for the creation of buffer stocks in an attempt to boost cocoa prices has met with a mixed response.

At the time of writing, the cocoa price in New York was US$2,045/ton, having been buoyed up slightly by a weaker US dollar. The London cocoa price, which is traded in Sterling, made some gains in the second week of October, leading to suggestions that the fact that prices have been so low for months could revive demand.

According to data published by the European Cocoa Association, third-quarter grinding in Europe increased to 353,500 tons. This put it 3 per cent higher than in the same period last year, and above the market’s expectation of a 2 per cent increase. This was the highest quarterly grinding figure in six years. Malaysia also reported a 4.7 per cent year-on-year increase in third-quarter grinding.

There was more good news, or at least slightly better news, when the International Cocoa Organization revised its estimate of the global supply surplus in the now finished 2016/17 crop year downwards, to take account of higher demand. That could result in a renewed upward adjustment of the demand estimate, given that the third quarter still counts towards the last crop year. However, all of the above are unlikely to do anything to change the fact of a record high supply surplus and record levels of suffering on cocoa farms in parts of West Africa.

Farmers in Côte d’Ivoire recently saw the price they receive for the cocoa they grow cut by more than a third as oversupply continued to weigh on prices. They will receive 700 CFA francs (US$1.23) per kg compared with 1,100 CFA francs a year ago. It is said that the price farmers receive would have been even lower had not the country’s President, Alassane Ouattara, agreed to suspend registration taxes for exporters in order to support prices.

In response to the huge fall in cocoa prices, Côte d’Ivoire and Ghana want to see the International Cocoa Agreement (ICA) modified to include the use, when necessary, of buffer stocks, a concept that hasn’t been part of the ICA since the 1970s.

Together, they have applied to the African Development Bank (AfDB) for help to support producers, not least by providing funds to build warehouses on the continent where cocoa could be stored. The AfDB has agreed to help with the establishment of a Cocoa Market Stabilization Fund and a Cocoa Exchange Commission to manage production. It has also agreed to work with them to establish a Cocoa Industrialization Fund to help develop the cocoa industry in the region. US$1.2 billion is being sought from the AfDB for projects to tackle cocoa swollen shoot virus disease; build the warehouses; promote processing and consumption; establish an African cocoa exchange; and to establish the stabilization fund. There’s a lot to unwrap and it’s all a work in progress.

“I don’t think the plan is realistic,” one well-known analyst told me. “If they could work together and hold 200,000-500,000 tonnes off the market it would make a material difference, but they are talking about the 2018/19 season as a starting point and I can’t imagine anybody actually taking it too seriously unless it was actually happening.

“Unless cocoa were to be destroyed I think history tells us that buffer stock/ production quotas don’t work. There will probably be cheating. If the stock is made available at a certain price, that price becomes a ceiling, and if that price is set at an unrealistically high level it will only encourage production, in which case they will end up buying stocks on an annual basis until the money runs out. The best cure for low prices is low prices, and we are certainly seeing the sort of grind response which might mean there won’t be much need to build stockpiles once 2018/19 rolls around.”

Other analysts suggest that something needs to change. They highlight the fact that even when prices are high, much higher, cocoa farmers live at or below the poverty line. Organizations such as Voice Network have been calling for something like the African plan for a long time. It argues that some form of supply management is necessary. It sees the joint plan as part of a potential solution to a long-term issue. At the heart of this long-term issue is the fact that although low prices save international chocolate companies billions, without higher prices, cocoa farmers in Côte d’Ivoire could go hungry.

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