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ANALYSIS: Cocoa's cartel proposal might look sensible - but only at first glance

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At a cocoa conference in London the head of the International Cocoa Organisation (ICCO) has floated the idea of the two major cocoa producers - Ivory Coast and Ghana, who combined account for around 70% of global output - getting together with other producers to try to exercise greater control over supplies and thereby prices.

 

These two countries, even though they dominate global supply, "are still price takers, if they were 90% [of output] they wouldn’t be price takers" said Mr Michael Arrion, who added that the cocoa sector will never be "sustainable" without higher prices.

 

If something looks like a cartel then it probably is one. The ICCO’s proposition of a cocoa cartel - a group of independent market participants colluding with each other to improve profits - will face intense resistance from many quarters.

 

Conspiracy against the public

 

The 18th century Scottish economist called cartels a "conspiracy against the public". As can be seen from the example of Opec (the Organization of Petroleum Exporting Countries) cartels can set production limits but these are always subject to the weakest link - individual countries can be tempted to produce beyond their agreed limit, to steal market share.

 

Few disagree that Africa’s cocoa farmers struggle with poverty. They make about $1 a day from their cocoa production.

 

In an attempt to alleviate farmer poverty Ivory Coast and Ghana introduced a "living income differential" (LID) scheme in July 2019, which attempts to impose a $400 per tonne on cocoa prices. There has been resistance to this scheme however, by cocoa’s biggest end-users - chocolate manufacturers.

 

Widely seen as the first step towards the formation of a general cocoa cartel, the LID scheme has been unsuccessful. Not only that - the Covid-19 pandemic has slashed global cocoa demand and the consensus is that the 2020-21 season will see a global surplus of as much as 317,000 tonnes, with another surplus in line for the subsequent season.

 

A recent Reuters poll anticipates cocoa futures slightly falling below current levels by the end of this year, with Ivory Coast producing 2.17m tonnes for 2020-21 (600,000 tonnes more than last season) and Ghana’s output 79,000 tonnes more year-on-year at 879,000 tonnes.

 

Prices depend on demand

 

Cartels work by rigging markets. It’s difficult to see how cocoa could successfully rig its market, when there are numerous economically poor cocoa-producing countries all vying for market share.

 

Even if smaller producers such as Nigeria, Cameroon and Ecuador joined, there will be temptations to break any supply maximum.

 

Smallholder cocoa farmers in Africa will always seek to maximise their (very low) income by producing as much cocoa as possible.

 

In late September 2019 the heads of the cocoa regulatory bodies in both Ghana and Ivory Coast said they planned to introduce production ceilings. Mr Brahima Yves Kone of Ivory Coast said "we need to be very harsh otherwise we’ll have an explosion [of production]." Ivory Coast said in 2019 it intended to "cap" its output at 2m tonnes - a level which will clearly be broken this season.

 

Back to the drawing board

 

All the time cocoa production is a business dependent on smallholder farmers, incentivised by producing as much as possible, the idea of a successful cartel - leaving aside Adam Smith’s ethical (and also legal) concerns - is a non-starter.

 

Cocoa farmer poverty, child labour, deforestation still exist in Africa’s cocoa sector, despite years of industry, government and civil society efforts to remedy these ills.

 

The ICCO needs to go back to the drawing board rather than go down the blind alley of a cartel.

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