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Cocoa prices may have a lot further to rise

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Cocoa prices look set to rise, one way or another, after Alassane Ouattara's ban on exports, to put pressure on political rival Laurent Gbagbo.

The difficulty is knowing when.

The 5% or so that New York cocoa futures have appreciated so far since the president elect of Ivory Coast ordered the curbs looks small beer compared with what may be in store - whether Mr Ouattara's embargo works or not.

Early days

That price reaction may look relatively muted, given Ivory Coast's position as the top cocoa producer. Imagine what would happen to, say, corn prices if the US blocked off shipments.

But that doesn't mean it won't force buyers to pay up further down the line.

The ban will take time to make itself felt on world supplies given that Ivory Coast has just finished its main crop, of some 1m tonnes, and has 300,000 tonnes cleared and waiting to be picked up.

And investors had already factored in a risk of disruptions, lifting New York cocoa futures by nearly 12% in the run up to the ban.

Besides, the one-month ban that Mr Ouattara has proposed may only be a taster. Mr Gbagbo looks unlikely to give up easily. Mr Ouattara may try several extensions of the ban, with cumulative impacts on prices, to achieve his aim.

Foreign reaction

But even if the gambit fails, that doesn't guarantee that buyers will sleep soundly for long. Indeed, their outlook could appear an awful lot worse.

Mr Gbagbo's continuation in power, despite losing presidential elections to Mr Ouattara two months ago, is hardly a recipe for enchancing the political stability Ivory Coast needs to encourage investment in its flagging cocoa industry.

In fact, it would inspire quite the opposite, given that the US has already waded in on Mr Ouattara's side.

Should Gbagbo hang on, investment programmes by the likes of Cargill, the US agribusiness giant, in Ivory Coast plantations are unlikely to do the same.

Back to the future?

Already the Ivory Coast's main crop, on its own responsible for more than one-quarter of world cocoa production, is falling at an annual rate of 4%, according to VM Group.

Annual rate of change in cocoa production, 2007-08 to 2010-11

Ivory Coast main crop: -4%

Ivory Coast mid crop: -3%

Ghana: +2%

Nigeria: +5%

Cameroon: +3%

Source: VM Group

The similarities with the 1950s-60s, when a lack of investment in cocoa plantations ending up causing prices to spike to record highs above $5,300 a tonne in the 1970s, looked concerning even before the latest Ivory Coast upset.

By clinging to power, Gbagbo only looks likely to increase the likelihood of history repeating itself.

Only by leaving peacefully, and soon, does a jump in cocoa prices look remotely avoidable.

By By Mike Verdin

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