CARTELIZATION OF COCOA, WHY AND WHY NOT?

Cocoa farming supplies the jobs for around 6 million people across the globe. It is estimated that about 75% of global cocoa supply comes from Ghana and C?te d’Ivoire. Nigeria and Cameroon follow also as some of the other leading producers of cocoa. According to Africa Development Bank, it is estimated that the global cocoa production is valued about US$12 billion on the export market. Also, the chocolate market valued at US$ 110 billion as at 2015. It is also estimated that about 1.5 million people are cocoa farmers in Ghana with the sector contributing 5.4% of the agricultural sector to Gross Domestic Product (GDP) of the country in 2019. All these facts highlight the significant importance of the cocoa industry in Ghana and her economy. However, farmers and the country at large do not benefit as much in comparison to other commodities such as oil, which has become the frontrunner of natural resources in Ghana. Cocoa farmers’ share of final proceeds has been gradually reduced over the years upon government subsidy for farmers.

To improve the income of cocoa farmers, Ghana and C?te d’Ivoire, with Nigeria also showing interest to join these countries have initiated the Living Income Differential Program. The program adds a premium to the prevailing market price. Unlike for a cartel, that can influence and set the world market price by restricting supply, this program only adds a premium to the world market prices. This raises the question of why African cocoa producing countries, which form majority of global cocoa producers in the market cannot form a cartel.

For a cartel to be effective, producers come to terms to co-operate in setting prices and output levels (not all producers in the sector need to join the cartel). To achieve a cartel’s objective, it must first establish the profit maximizing output level, at which point marginal revenue (MR) equals marginal cost (MC). This equilibrium output determined by the cartel is then divided among its members by setting output quotas for each member. This would maximize cocoa producer group’s profit with the restricted cocoa output. Each member must therefore not sell above the quotas assigned. By doing this, the price of cocoa would rise in the world market. This would then result in higher profit made by cocoa producers.

The larger the number of suppliers however, the more it is difficult to form a cartel. Price and output co-ordination among members cannot be easily achieved. However, there are a few major suppliers of cocoa and hence co-ordination can be done easily among members. This means that cartel members must control majority of cocoa’s world supply. This effectively means that the producers should have a potential monopoly power. Another factor noteworthy is the elasticity of the demand for cocoa. Even if the organization can agree on the output levels, there will be little opportunity for price rise if it has highly elastic demand. The obvious reason why demand of cocoa should not be price elastic is that an increase in price would result in significantly change in quantity demanded.

?Challenges faced by Cocoa Cartelization

For cocoa producing countries to be able to form a cartel, - so that prices will be above the competitive market prices and lead to maximum profit for cocoa producing countries,-there are some setbacks that would be faced. We go on to some of these challenges below.

?

·????????Cost differences

For the cocoa cartelization to be effective, the cost structure of member countries should be the same or similar. This means that the production cost of cocoa, including but not limited to labour, pesticides, fermentation, pod breaking, pruning, weeding. The standard cost structures will mean that cartel members have the same or similar marginal costs. With the same or similar marginal cost, members of a cartel can set output level and assign quota to each other. The cartel can consequently determine the cocoa price in the world market. Factors causing these cost differences may include the land tenure systems available in member countries and the varying ages of cocoa trees.

?

·????????Substitute goods

The effectiveness of setting price of cocoa depends on the cartel monopoly power. The availability of substitutes weakens the ability to set prices in the world market for cocoa. For example, International Copper Cartel (CIPEC) which consist of Chile, Peru, Zambia and Congo is fully operational but has never had a significant impact on copper prices. This is because the price of copper is elastic due to the availability of substitutes. One main example of a substitute for copper is aluminum. This hence weakens monopoly power. In the same vein, since coffee is a substitute for cocoa, the monopoly power weakens and therefore it can be difficult to drive up prices. Any increase in prices means that consumers will shift the demand for cocoa to coffee and that will force the price of cocoa to fall. This would make it impossible to run a cartel.

?

Solving the Problem Faced by the Cocoa industry

Instead of forming a cartel to be able to set output level and drives prices of cocoa upwards, which is not possible in the long run, it is important for authorities to come out with policies that are streamlined towards creating value addition to cocoa. As already mentioned, the cocoa industry is a multibillion-dollar one. It is estimated that the market value of chocolate is US$110 billion as compare to US$12 billion market value for cocoa. Instead of exporting the raw cocoa beans, the processing of the cocoa into cocoa related products could lead to value addition. The creation of various companies in the supply chain including processing companies, warehousing among others, would very beneficial. ?These benefits cannot be underestimated. There would be massive increase in employment opportunities for cocoa producing countries such as Ghana, C?te d’Ivoire, Nigeria and Cameroon.

The cocoa resource-endowed countries should engage with other African countries to feed them raw materials for processing into cocoa products in these other countries with comparative advantage for processing.

With the abundance of cocoa in countries like Ghana, C?te d’Ivoire, Nigeria and Cameroon, cocoa in its raw state can be supplied to countries where cocoa is relatively scarce.

Also, producer countries must encourage domestic consumption of cocoa products as means of creating or increasing demand in the domestic market. Where there is a large domestic market, a country’s exports would only be an extension of the production for the domestic market. Thankfully, the Africa Continental Free Trade Agreement (AfCTA) is an enabler for the domestic market for cocoa products. Member countries of AfCTA, which produce would benefit significantly as jobs will be created and there would an increase in increase in tax revenue.

Do you think our cocoa farmers and government are benefiting as much as they should with the existing arrangements from cocoa?

Share your thoughts!