For Cocoa Farmers, High Prices are Bittersweet

21 July 2010

Trading at prices unheard of in the last thirty years, cocoa is drawing the attention of hedge funds and civil society alike. Armajaro, a London-based commodities fund, recently bought futures contracts worth UK£650 million - an amount equivalent to seven percent of all of the cocoa grown in the world this year. Some NGOs fear that dramatic changes in prices will rattle farmers and limit their capacity to cash in on the boom.

Investors are betting that prices will probably continue rising much as they did during the spike in food prices in 2008 - a reflection of growing demand in emerging markets and low global stocks of the crop.

However, agreements that govern trade in cocoa, such as the International Cocoa Agreement that was concluded in June, are powerless to cushion the fluctuations that often accompany commodities at peak prices.

Cocoa, like other heavily traded farm goods, including tea and coffee, has seen its price fluctuate wildly since the late 1970s. Growing incomes in India and China and an expanding global appetite for dark chocolate have strongly fuelled demand, causing prices to double since 2005.

Price volatility putting livelihoods at risk

Cocoa is produced in some of the poorest countries in the world; Sierra Leone, Togo and Madagascar are among the leading exporters of the crop. Other developing countries rely heavily on cocoa for their export earnings - in Ghana, it makes up 34.1 percent of total exports. Approximately 14 million labourers and 2.5 million small-scale farmers depend on cocoa for their livelihoods across the world.

But despite the surge in international prices, cocoa farmers' profits in Ghana have not budged. Laurent Pipitone, Senior Statistician at the International Cocoa Organization, explained that this was due to the limited liberalisation of the Ghanaian cocoa market. He noted that this was in contrast to other countries, where "cocoa prices are almost all being transmitted to farmers."

The translation of prices from international to domestic markets has been a pivotal concern for the World Bank, the WTO and other actors that hope to create better links between areas with food shortages to places with surpluses.

Ghanaian farmers receive a fixed price at the beginning of the season for their harvest. Although this protects them from losses in the case of a price drop, it also limits their ability to profit when prices shoot up. Due to pressure from farmers, the Ghana Cocoa Board is expected to issue them a bonus as compensation for higher world prices.

While prices continue to fluctuate, the amount of cocoa grown has nudged upward only slightly while stocks of the good have fallen.

Pipitone cited political instability, lack of investment and a shortage of labourers as the causes for limited growth in production in Côte d'Ivoire, the world's largest exporter of cocoa. Lack of investment in agriculture generally has been identified as a key cause of the global food crisis that has left nearly a billion people hungry.

Prospects for the future

The last major peak of cocoa prices occurred in the late 1970s, when global stocks were one sixth of current estimates. Pipitone told Bridges not to "expect a huge impact on markets in [the] medium term" from the purchases of cocoa futures by Armajaro and others.

Kate Blagojevic, a spokesperson from the World Development Movement, an NGO campaigning to bring volatility in agricultural commodities to light, acknowledged that "it may be the case that cocoa prices will not be impacted in the medium term." But, she added - citing a recent article in The Guardian - "traders were [already] angry about the price manipulation" caused by "speculation" in the cocoa market.

Although some economists have tested for and failed to find a relationship between speculation and the movement of agricultural commodity markets in 2008, others have warned that financialisation of these markets - the sudden influx of large amounts of cash - is likely to have dire consequences for those farmers at the margin who depend on stable prices to eke out a living.

The most recent draft of the WTO agriculture modalities - a blueprint for a final Doha agreement - allows for commodity agreements that stabilise prices in a manner that is "equitable and remunerative." However, a Geneva-based representative of a leading cocoa-exporting nation told Bridges that the commodities element of the modalities has not been "firmed up."

The price of cocoa is likely to remain a key development concern, yet it is unclear what policy tools are needed to ensure that farmers benefit more directly.

ICTSD reporting; "Cocoa prices at 32-year high, but Ghana maintains purchase price," GHANA BUSINESS NEWS, 15 July 2010.; "Cocoa investor 'buys £650m of beans'" BBC News, 19 July 2010; "Hedge funds accused of gambling with lives of the poorest as food prices soar" The Guardian, 19 July 2010.

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