Early last year we published a blog on Nigeria’s dollar shortages resulting from falling oil revenues and its efforts to diversify its economy. At that time, the cocoa sector appeared primed to regain its place as a leading foreign exchange earner. However, 2016 turned out to be a tumultuous year in the cocoa sector: the London benchmark price dropped almost 40 per cent over the course of the year and is trading at its lowest level since 2013. In New York, the cocoa contract is at an eight year low.
Lenders that have financed against cocoa stocks or revenues from unhedged cocoa contracts have found that their security is worth much less than they thought. In secured financings this is significant because the amount of the facility is usually fixed against the value of the secured assets, and in borrowing base financings in particular breach of a pre-determined security coverage ratio can have significant consequences if not remedied.
Borrowers may be concerned that lenders experiencing difficulties with existing facilities might look to tighten lending criteria in respect of cocoa and other “soft” commodities. Whether this concern will materialise remains to be seen.
West African cocoa producing economies
Around 70 per cent of the world’s cocoa comes from West African countries such as Côte d'Ivoire, Ghana and Nigeria, with Côte d'Ivoire being the leading producer. Since the bad weather conditions which damaged West African crops in 2015, growing conditions have improved and supplies rebounded. Unfortunately, global demand has not kept pace. The longer cocoa prices, and the related dollar revenues remain low, the greater the impact on the ability of countries such as Côte d'Ivoire to service their dollar denominated debts and liabilities.
To combat the low prices, the Ivorian government set the national price for cocoa at a record high of US$1.80 per kilo in October 2016. However, this simply resulted in many cocoa buyers defaulting on their forward contracts. In a country where more than a quarter of the population are dependent on earnings from cocoa, this could have serious consequences.
In addition, the reluctance of Ivorian factories to buy, coupled with lower demand, has led to a bottleneck at the world’s busiest cocoa exporting port, San Pedro. Some truck drivers wait longer than a month to unload their cocoa and stock has been piling up in warehouses around the port.
Producers and consumers
The oversupply of cocoa is expected to continue throughout the year, and some analysts predict several more years of oversupply. The low price will undoubtedly force some producers to consider diversification, whether by focusing on other soft commodities, or in the case of some Ghanaian farmers, looking to other sectors entirely.
While low cocoa prices might eventually support increased consumption, in many consumer regions such as the United States and Europe consumers are increasingly seeking out healthier options rather than cheaper ones, and demand for chocolate in developing countries such as China and India has not yet hit the levels many expected.
Those active in the cocoa and broader softs sector will be paying close attention in the year ahead to the challenging supply side issues in Côte d'Ivoire, overall global demand and the risk appetite of financiers going forward.
Inside Africa would like to thank Ilian Petrov, trainee, for his contribution to this blog post.