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Cocoa: Avoiding a Pile Up

Spare a thought for Ghana and Ivory Coast who jointly account for around 70% of the global cocoa bean market. With bean exports accounting for around 20% and 14% of total exports respectively, both have recently put great store in boosting output on the assertion that the global demand for chocolate would continue climbing. There was even talk of looming shortages as poor weather pressed on crop levels and quality. However, worldwide sales have slowed sharply over the last few years on the back of lukewarm economic growth and what increasingly seems like a secular shift towards healthier snacks and treats. Consequently, cocoa prices dipped by nearly 8% last year with another 30% drop, to around $2000/tonne, expected in 2017.

Along with more cocoa output, both countries have also sought to develop their chocolate production capabilities. Such steps have been underpinned by the view that there are major economic and financial gains to be made from securing a larger share of the bean-to-bar production process and exporting more value-added confections.

As ever, the situation on the ground is more complex than the textbooks suggest and the jury is out on the experiment. For a start, with the local market in both countries seemingly too small to develop a sustainable domestic model, manufacturers have tried to penetrate Western outlets. However, their export efforts have been hampered by strict regulations on the temperatures at which refining takes place, which requires a lot of expensive imported machinery, as well as the final ingredients. For example, EU regulations means that much of the additional elements, such as cows milk, must be sourced from abroad, which undermines profitability.

Creative thinking required. Despite the forecasts of a further slowdown in demand over the medium-term, all is not lost. There is some talk of both countries co-operating to support prices by limiting cocoa supply. They should also be able to piggy back on the recent shift towards dark chocolate which, because of its lower sugar and cows milk content, is seen as a healthier and more authentic alternative. In addition, the rising market for plant-based milk alternatives such coconuts and cashew nuts, which form around 7% and 2% of Ivory Coast and Ghana's export baskets respectively, suggests that there is scope for developing new chocolate products. Allied with some innovative marketing, there could be plenty of upside yet for West African cocoa.

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