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Commodities under Neoliberalism:The Case of Cocoa

Irfan ul Haque

No. 25, January 2004

G-24 Discussion Paper Series

Research papers for the Intergovernmental Group of Twenty-Fouron International Monetary Affairs

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iiiCommodities under Neoliberalism: The Case of Cocoa

PREFACE

The G-24 Discussion Paper Series is a collection of research papers preparedunder the UNCTAD Project of Technical Support to the Intergovernmental Group ofTwenty-Four on International Monetary Affairs (G-24). The G-24 was established in1971 with a view to increasing the analytical capacity and the negotiating strength ofthe developing countries in discussions and negotiations in the international financialinstitutions. The G-24 is the only formal developing-country grouping within the IMFand the World Bank. Its meetings are open to all developing countries.

The G-24 Project, which is administered by UNCTAD�s Division on Globalizationand Development Strategies, aims at enhancing the understanding of policy makers indeveloping countries of the complex issues in the international monetary and financialsystem, and at raising awareness outside developing countries of the need to introducea development dimension into the discussion of international financial and institutionalreform.

The research papers are discussed among experts and policy makers at the meetingsof the G-24 Technical Group, and provide inputs to the meetings of the G-24 Ministersand Deputies in their preparations for negotiations and discussions in the framework ofthe IMF�s International Monetary and Financial Committee (formerly Interim Committee)and the Joint IMF/IBRD Development Committee, as well as in other forums.

The Project of Technical Support to the G-24 receives generous financial supportfrom the International Development Research Centre of Canada and contributions fromthe countries participating in the meetings of the G-24.

COMMODITIES UNDER NEOLIBERALISM:

THE CASE OF COCOA

Irfan ul Haque

G-24 Discussion Paper No. 25

January 2004

viiCommodities under Neoliberalism: The Case of Cocoa

Abstract

The paper examines the case of cocoa as an illustration of the problemsfaced by primary commodity producers. The impact of marketliberalization in cocoa producing countries as well as consumingindustrial countries on the cocoa price and cocoa farmers is examined.The paper shows that the market liberalization cannot be held responsiblefor such improvements in productive efficiency as occurred over time,which was one of the two stated goals of these measure. Nor is thereconvincing evidence that the producer�s share in the export priceincreased, which was the other goal. A serious consequence of thepreoccupation with market liberalization, however, was that it divertedattention from the main concerns of cocoa producers, viz., the marketvolatility, low prices, and the declining producers� share in the valuechain. The paper then goes on to explore the kinds of action that mightbe considered to address these issues. It makes a case for filling theinstitutional vacuum that has been created as a result of the abolition ofstate marketing authorities in several cocoa producing countries. Thepaper attempts to show that the conditions are favourable for cocoaproducers to coordinate their production policies in order to maintainsatisfactory cocoa prices, which is needed to arrest the erosion of incomesof cocoa producers.

ixCommodities under Neoliberalism: The Case of Cocoa

Table of contents

Preface ............................................................................................................................................ iii

Abstract ........................................................................................................................................... vii

I. The cocoa market and price formation ................................................................................. 2A. Cocoa production ................................................................................................................. 2B. The behaviour of cocoa prices ............................................................................................. 4

II. The impact of neoliberal policies ............................................................................................ 7A. Market liberalization in producing countries ....................................................................... 7B. Structural changes in the world cocoa market ................................................................... 11

III. Revisiting the generic issues .................................................................................................. 13A. Price instability .................................................................................................................. 13B. Possibilities for price maintenance .................................................................................... 15C. Cocoa producers and the value chain ................................................................................ 16

IV. Conclusion .............................................................................................................................. 18

Appendix ........................................................................................................................................... 20

Notes ........................................................................................................................................... 21

References ........................................................................................................................................... 21

List of tables

1 Growth rates of production and area harvested ......................................................................... 32 Yields per hectare ....................................................................................................................... 33 Price volatility index for cocoa and selected commodity groups .............................................. 44 Volatility in the export unit value in major cocoa producing countries ..................................... 55 Cocoa prices and the stock ratio ................................................................................................ 66 Regression results ...................................................................................................................... 77 Producer prices in per cent of export unit values ....................................................................... 98 Estimates of costs of production in major cocoa producers .................................................... 109 Import duties on cocoa in main markets .................................................................................. 18

List of charts

1 Major producers of cocoa .......................................................................................................... 22 Cocoa prices and stock-to-grinding ratio, 1961�2001 ............................................................... 63 Ratio of production costs to producer price, and growth of output ......................................... 11

There was a time when commodities figuredprominently in the discussions on international trade,financial, and development issues. Already in theearly 1940s, Keynes, in conceptualising what wereto emerge as the twin Bretton Woods institutions,devoted a great deal of thought to the commodityissue and its close links with international financialstability (Keynes, 1943). He laboured in the shadowof the Great Depression, when commodity pricesplummeted to depths not seen before, and worriesover commodity shortages during and after the WorldWar.

At that time, the commodity problem � the vola-tility and unreliability of commodity markets � wasof concern to industrial as much as to developingcountries. The disjuncture of interest in commodi-ties came later, as the former succeeded in reducingtheir dependency on commodity imports with thedevelopment of synthetic substitutes and other meansand by putting in place a formidable structure ofagriculture protection,1 even as, for a large part of

the developing world, commodities continued as themain providers of livelihood and foreign exchange.

Thus, the interest in international solutions tothe commodity problem on the part of the industrialcountries waned over time, turning into virtual hos-tility to global cooperative actions under the swayof the neoliberal ideas. International commodityagreements, buffer stock schemes, and other stateinterventions are now widely held as failures, neverto be repeated again.

But the commodity problem remains. It afflictsparticularly the poorest countries, threatening theirlivelihood and jeopardising their national economicmanagement through strains on government budg-ets and exchange earnings. There is a reluctance totake up the subject of commodities and explore pos-sible solutions in the world forums concerned withissues of trade and finance. Jacques Chirac has calledit �a sort of conspiracy of silence�.2 While the worlddevelopment community, rightly, worries about the

COMMODITIES UNDER NEOLIBERALISM:THE CASE OF COCOA

Irfan ul Haque*

* In preparing this paper, I benefited from the advice and comments from a number of persons, particularly Mehmet Arda, AlanBrewer, Olivier Matringe, Erich Supper, Henning Terwey, and Jan Vingerhoets. To all of them, I am most grateful. Thanks are alsodue to Arunas Buktevisius for his help in accessing key data bases and to Yusuf Haque for a tutorial on how futures markets functionin reality.

2 G-24 Discussion Paper Series, No. 25

external debt burden on the very poor countries, itgives little thought to what is arguably the other halfof the problem.

This paper aims to contribute to the current ef-forts launched by several NGOs and others to bringback the issue of commodities into the world trade,finance, and development agenda. It examines thecase of cocoa, a commodity that remains importantas a source of income and foreign exchange earn-ings for several developing countries and that hasbeen subjected to market liberalization at both do-mestic and international levels. It will be seen thatcocoa captures rather well some of the principal ge-neric issues that face primary commodities, andtherefore offers insights into the kind of actions thatmight be considered to address the commodity prob-lem.

The paper is organised as follows. The firstsection describes the structure of the cocoa marketand identifies the factors that are deemed to explainprice formation. This provides the necessary back-ground to the discussion on the impact of neoliberalpolicies on cocoa producers, a matter that is ad-dressed in Section II. Section III then addresses thegeneric issues and explores the remedies that mightbe considered in the light of past experience. Thelast section offers conclusions.

I. The cocoa market and priceformation

There are basically three generic issues thatarise in the context of primary commodities: theworld market volatility, the declining trend in com-modity prices, and the relatively small share ofprimary producers in the �value chain�.3 They ariseout of the way primary commodity markets are struc-tured, function, and behave. Since at the core of thecommodity problem is the struggle for bringingworld supplies and demand into balance in the shortas well as long-term, who produces what and at whatcost is central to its resolution.

A. Cocoa production

Cocoa is among the more important commodi-ties exported by developing countries, with a world

total of about $2.5 billion in recent years. Althoughthe plant came originally from the Americas, theprincipal producers of cocoa, since its rise as a ma-jor export over the past century, have been in WestAfrica. Four countries � Côte d�Ivoire, Ghana, Ni-geria, and Cameroon � account for about two-thirdsof world production, and three-quarters of worldexports of cocoa beans (chart 1). Starting virtuallyfrom nothing, Indonesia ranks today as the secondhighest producer, just slightly above Ghana, oncethe world�s largest producer. Other major producersare Brazil and Malaysia, accounting together for alittle more than 10 per cent of world output.

Cocoa producers are a rather diverse group.Brazil and Malaysia are relatively high-incomedeveloping countries, while Ghana, Nigeria, and In-donesia are among the lower-income countries. Côted�Ivoire and Cameroon fall somewhere in the mid-dle. Four countries � Cameroon, Côte d�Ivoire,Ghana, and Malaysia � have rather small populations,ranging between 10�20 million, while the other threemajor producers have populations falling within therange of 100�200 million. For the four largest econo-mies (due to their relatively high per capita incomeor large population), cocoa is a rather insignificantsource of income, employment, or foreign exchange

Côte d'Ivoire

44%Ghana14%

Indonesia14%

Malaysia3%

Nigeria11%

Cameroon4%

Brazil8%

Others2%

Chart 1

MAJOR PRODUCERS OF COCOA

(1997�2001 shares in world production)

3Commodities under Neoliberalism: The Case of Cocoa

earnings. For these countries, cocoa exports amountto less than one per cent of the total export earnings.On the other hand, for Côte d�Ivoire and Ghana, morethan 30 per cent and 25 per cent of the total earn-ings, respectively, comes from cocoa exports. Thus,what happens in the world cocoa market is ofcritical interest to these two countries, and the de-velopments in these two countries have a greatimpact on the world market.

The structure of production � how productionis organized � also differs among countries. Whileproduction in West Africa is heavily concentrated invery small farms, cocoa farms in Brazil tend to bebigger (ranging between 10 to 100 hectares), whileMalaysia has mostly large estates. Indonesia con-tains both large plantations (some privately owned,some owned by state) and smallholder producers,though the share of the former has declined fromsome 80 per cent to about 20 per cent of the outputin the last two decades (Bedford et al., 2001).

There are significant differences between thetwo modes of production. Large estates (especiallythose privately-owned) are run rather like commer-cial firms, i.e., profitability is given much greaterweight in production decisions. For smallholders,profits do not have a clear meaning since they alsoprovide labour. Large estates are therefore less wed-ded to producing cocoa and are more prepared towithdraw when market conditions turn unfavourable.Their large size and financial resources make thembetter able to adopt high-yield varieties and new tech-nologies and business practices, with the result thatoverall yields on estates tend to be considerablyhigher. But this advantage is offset by the fact thatcocoa is quintessentially a smallholder crop that re-quires high labour input to harvest and dry the crop.Thus, in terms of production costs, smallholder pro-ducers have considerable advantage over the largerestates (Ruf and de Milly, 1990).

The 1990s witnessed a sharp slowdown in over-all production of cocoa, mainly as a result of thedeclines in Malaysia and Brazil. Ghana and, to amuch smaller extent, Cameroon were the only ma-jor producers where production rose faster than inthe decade before (table 1). Although Indonesia�srate of expansion also slowed (which was to be ex-pected, considering the very small base from whereit started), its production nevertheless continued toexpand at what is an astounding rate of 13 per cent ayear.

Table 2 gives the data on yields relative to theoverall average in each of the leading cocoa produc-ing countries. In this respect, the West Africancountries and Brazil lag far behind the two Asianproducers, Malaysia and Indonesia. Côte d�Ivoire

Table 1

GROWTH RATES OF PRODUCTIONAND AREA HARVESTED

(Annual trend rates of growth, per cent)

AreaProduction harvested

Country 1980�1989 1990�1999 1990�1999

Brazil 1.9 -2.8 -0.1Cameroon 1.7 2.2 0.6Côte d�Ivoire 8.8 6.7 5.2Ghana 0.8 5.7 8.3Indonesia 28.4 12.8 7.7Malaysia 23.8 -12.4 -14.2Nigeria 4.5 1.0 2.1

World total 5.2 2.1

Source: FAO database.

Table 2

YIELDS PER HECTARE

(Relative to overall average = 100, per cent)

Country 1990�1994 1995�1999

Brazil 84 69Cameroon 56 64Côte d�Ivoire 101 105Ghana 73 64Indonesia 166 176Malaysia 147 151Nigeria 73 71

Source: FAO database.


and Indonesia realised output expansion through acombination of expansion of the area harvested andimproved yields, while yields in Ghana declined.The relative position of Brazil, Ghana, and Nigeriadeteriorated over time, while Côte d�Ivoire andCameroon registered an improvement. Brazil�s yieldsand overall output suffered from �witches� broom�,a plant disease. In the case of Ghana, Nigeria, andCameroon, the main reason for low yields is thedominance (50 per cent or higher) of old trees of30 years or higher age.

The availability of a suitable natural envi-ronment is critical to future expansion of cocoa.According to an International Cocoa Organization(ICCO) study, soil and climate conditions were con-sidered particularly favourable for cocoa productionin Malaysia and Indonesia, though they are unableto dry the harvest naturally, which makes the cocoaacidic (Ruf and de Milly, 1990). Because of this andthe fact that their output is of uneven size and highshell content, the market price for the East Asiancocoa is discounted. Conditions in the other produc-ing countries were held to range from average togood. Without threatening the virgin rainforests, landavailability for cocoa farming is modest in the caseof Brazil, Nigeria, and Côte d�Ivoire. Malaysia, asnoted, reduced drastically its area under cocoa inthe 1990s. Indonesia is the only major producer withconsiderable land availability, though Ghana too hasgood potential. Cocoa from Ghana (and, until re-cently, Cameroon) is considered to be of high quality,and attracts a premium in the market.

B. The behaviour of cocoa prices

The behaviour of cocoa prices has been typicalof other primary products: wide fluctuations and adeclining secular trend. Table 3 gives the estimatesof price volatility (after adjusting for inflation)4 forcocoa and a few selected groups of agricultural prod-ucts. As they have been averaged over the year, theseindices underestimate the price volatility on a day-to-day basis. However, the year-to-year fluctuationsare likely to give a better sense of the fluctuations infarmer income, since the price on any single day af-fects only the trades of that day.

During practically each of the past four dec-ades, the cocoa price was more unstable than theentire group of tropical beverages to which cocoa

belongs (the other commodities in the group are cof-fee and tea) as well as the other commodity groups,�vegetable oilseeds and oils� and �agricultural rawmaterials�. The only exceptions were the 1980s,when the cocoa price was just a little less volatilethan vegetable oilseeds and oils, and the 1990s, whenit was overall more stable than its own group aver-age.

The data also indicate that the price volatilitytends to rise in periods of high global inflation, i.e.,the 1970s and the 1980s, even though inflation assuch seems to have little influence on the volatilityof individual prices. The instability indices relatingto current prices (not shown) are of an order of mag-nitude similar to those for prices adjusted for generalinflation. What is of significance, however, is thatthere is no indication that the economic liberaliza-tion and globalization of the 1990s made agriculturalprices more unstable. In fact, the instability index ineach case was lower than in the previous decades, insome cases considerably so. It is also the case thatthe International Cocoa Agreements (ICA) of the1970s and 1980s did little to stabilise prices, an is-sue taken up later. One likely explanation for thegreater price stability could be the very low pricesof the 1990s. Since cocoa supplies are difficult toincrease in times of scarcity (trees take a long timeto mature) and slow to reduce in periods of abun-dance (smallholders do not readily shift to otheroccupations), cocoa prices are known for their sharppeaks and long, flat bottoms.

Table 3

PRICE VOLATILITY INDEX FOR COCOA ANDSELECTED COMMODITY GROUPS

(Per cent)

1960� 1970� 1980� 1990�1969 1979 1989 1999

Cocoa 16.3 22.0 20.3 11.5Tropical beverages 5.2 21.0 18.5 17.9Vegetable oilseeds and oils 6.4 17.0 22.7 7.5Agricultural raw materials 4.0 11.6 6.2 5.9

Source: UNCTAD.


The situation with respect to the variability inthe export unit value, which approximates the f.o.b.price received by the producing country, is ratherdifferent. The data in table 4 show that the volatilityin export unit value (measured in current US dol-lars) was much higher in each of the major cocoaproducing countries than the volatility in the worldprice during the 1980s as well as the 1990s.5 Thereis no satisfactory explanation for this, except thatexport activity might be concentrated during that partof the year when cocoa is harvested, a time whenthe spot market is more active and fluid.

However, the extent of volatility in the unitvalues between the 1980s and 1990s was mixed. Theinstability index declined sharply for Ghana, whichdid not liberalize its cocoa sector, and increasedsharply for Cameroon, which did. The index changedvery slightly for other countries, falling for Côted�Ivoire and Indonesia, and rising in the case ofNigeria and Brazil. The impact of liberalizationmeasures is examined in the next section.

Even though the international cocoa agreementsand state marketing authorities were meant to inter-vene in the market, there appears to be no evidencethat this had any discernable impact. The interac-tion of supply and demand � as reflected in themovements of world stocks of raw cocoa � seems tohave largely determined the world cocoa price. Fall-ing stocks imply demand in excess of supply at theprevailing price, and the opposite occurs when thestocks rise. Chart 2, which traces the relationshipbetween the cocoa price (in constant SDRs) and theratio of cocoa stocks to grindings (representing de-mand for cocoa) over the 1961�2000, provides anindication that cocoa prices do indeed have a ten-

dency to rise when cocoa stocks are low in relationto grindings, and vice-versa.

Table 5 gives the 10-year average for both stocklevels and prices over the last four decades. On theface of it, it is possible to explain the high pricesduring the 1970s in terms of low stock levels, andthe low prices of the 1990s in terms of high stocks.Similarly, comparing the situation during the 1960sand the 1980s, it is seen that the prices were 11 percent lower in the latter period when the stock ratiowas about 8 per cent higher. Thus, even at a fairlyhigh level of aggregation, the negative relationshipbetween the stock-to-grinding ratio and the worldprice appears to hold rather well.

Nevertheless, a closer examination of the rela-tionship is warranted. Visual inspection of chart 2suggests that the relationship is far from stable andthat the price decline during the 1990s is hard toexplain exclusively in terms of the movement ofstocks within the decade. In order to see how therelationship held up over time, regressions were runfor the data on prices and stocks including and ex-cluding the time trend. The results are reported intable 6.6

Taking the 1961�2001 period as a whole, thereappears to be a fairly robust relationship betweenthe cocoa price and the stock-to-grinding ratio,though there is also a statistically significant long-term declining trend in the price of 2 per cent a year.In other words, the stock levels have an impact oncocoa prices in addition to an underlying long-termdeclining trend. On an average, each percentage pointincrease in the stock ratio is associated with a pricedecline of 3 per cent. The time trend and the stock

Table 4

VOLATILITY IN THE EXPORT UNIT VALUE IN MAJOR COCOA PRODUCING COUNTRIES

(Per cent)

Brazil Cameroon Côte d�Ivoire Ghana Nigeria Indonesia World price

1980�1989 18.7 15.3 21.8 25.3 19.8 21.5 14.81990�2000 18.8 27.5 19.5 13.5 20.7 21.2 12.3

Source: Derived from the data on export unit values from the FAO database.


ratio together explain some 75 per cent of the varia-tion in price over the entire period. This relationshipholds well for the first three sub-periods (covering1961�1990 period); in fact, the relationship is evenstronger. The coefficient of the stock ratio is remark-ably stable at about 3 per cent, whether the decadesare taken together or severally. The price trend over

these three periods, however, shows wide fluctua-tion; after a declining trend of 4 per cent a year during1961�1970, it shoots up to a rising trend of 10 percent a year during the 1970s, only to decline againat a rate of 7 per cent a year during the followingdecade. In short, while the sensitivity of the pricewith respect to changes in the stock ratio is quitestable, the time trend captures the impact of factorsspecific to the period in question.

The 1990s, however, mark a sharp break withthe past in that the explanatory power of the twoindependent variables is greatly diminished. Neitherthe stock ratio nor the time trend has a coefficientthat is significant at 95 per cent level of confidence,though the coefficient for the stocks still remains at0.3. This suggests that the depressed prices of re-cent years call for an explanation that goes beyondthe factors that were seen to be historically impor-tant. At the same time, we need to explain the factorsthat are responsible for the secular decline in cocoaprices, which seems to be independent of the forcesof supply and demand. It would be one thing if thedecline were due to improvements in overall pro-ductive efficiency; quite another, if it resulted fromdeclining real wages and general living standards.

Table 5

COCOA PRICES AND THE STOCK RATIO

(10-year period average)

Stock ratio World price(per cent) SDR2002/ton

1960�1969 40.1 2875

1970�1979 27.5 4375

1980�1989 43.0 2582

1990�1999 54.1 1063

Source: ICCO.

Chart 2

COCOA PRICES AND STOCK-TO-GRINDING RATIO, 1961�2001

0

10

20

30

40

50

60

70

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

Stoc

k-to

-grin

ding

ratio

(per

cen

t)

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Pric

e pe

r ton

Stock-to-grinding ratio,left-hand scale

SDR price in constant 2002 SDRs, right-hand scale


II. The impact of neoliberal policies

The rise of neoliberalism had a profound influ-ence on the functioning of commodity markets, theircontrol within producing countries, and the discus-sion of the commodity problem itself. Internationalcommodity agreements have been all but abandoned;the few that still exist stay away from the so-called�economic clauses�, i.e., clauses relating to controland regulation of production and exports with a viewto maintaining or stabilising prices. In countries withstate bodies engaged in buying, storing, and sellingof commodities, the liberalization measures focusedprimarily on their dismantlement. Market liberali-zation and deregulation also occurred in the industrialcountries, though they showed remarkable pragma-tism in protecting their interests in agriculture as wellas in other spheres of economic activity.

Cocoa has not been immune to these develop-ments. Earlier international cocoa agreements reliedon buffer stocks for defending cocoa prices withinspecified bands. The scheme failed to stabilise pricesduring the 1970s, as there were no stocks that could

be unloaded in the market; besides, producers facedwith high cocoa prices had lost interest in price sta-bility. In the late 1980s, on the other hand, when thecocoa price collapsed, the buffer stocks reachedrather quickly their prescribed limit of 250,000 tons(representing roughly six-weeks of demand forgrindings) without strengthening prices, and the ef-forts at price stabilization were abandoned. The 1993cocoa agreement dropped the provisions for bufferstocks or price ranges altogether.

In order to see how cocoa producers have beenaffected by market liberalization, it is necessary toexamine the developments both within producingdeveloping countries and in consuming, industrialcountries. There has been only scant attention givento the latter�s impact on the cocoa market.

A. Market liberalization in producingcountries

When discussing the measures to liberalizeeconomies, the focus has basically been on theWest African cocoa producers, viz., Côte d�Ivoire,Cameroon, Ghana, and Nigeria, as these were theproducers where the state had played a dominant rolein cocoa trade. In other respects, the state�s role ineconomic activity or promoting economic develop-ment has not been too different from cocoa producersin East Asia or Latin America. The West Africangovernments were not involved in the productionand harvesting of cocoa, but concentrated on thepurchase of domestic cocoa for export at givenprices. In addition, the government institutions re-sponsible for this task � marketing boards in theAnglophone countries (Ghana and Nigeria) and somesort of centralised funds in the Francophone coun-tries (Côte d�Ivoire and Cameroon) � played a rolein quality control, research on plant breeding, mar-ket intelligence, and extension service.

There were, however, significant differencesbetween the two groups of countries as to how thetask of marketing was performed. Typically, themarketing boards managed the entire marketingprocess, buying cocoa directly from producers andselling it to traders and processors at a specified,guaranteed price at least for the whole cocoa sea-son, if not longer. The caisse system, on the otherhand, did not involve ownership or direct handling

Table 6

REGRESSION RESULTS

(Price as dependent variable)

Intercept Time Stock-ratio R2

1961�2001 50.74 -0.02 -0.03 0.75(4.75) (6.84)

1961�1970 90.40 -0.04 -0.03 0.87(2.95) (5.99)

1971�1980 -195.82 0.10 -0.03 0.86(5.03) (3.25)

1981�1990 153.10 -0.07 -0.02 0.99(17.56) (18.38)

1991�2001 170.82 -0.08 -0.03 0.29(1.71) (1.38)

Note: The regressions are least-squares, semi-logarithmicin prices. The parentheses give the t values.


of the crop at any stage, but instead relied on privatelicensed traders for domestic purchase and export.The authority, however, did guarantee a producerprice and established a scale for all payments in-volved from the farm to export and another scale forthe difference between the f.o.b. and c.i.f. prices formain destinations. As a result, depending on the dif-ference between the world market price and the guar-anteed producer price, the fund, in principle, couldaccumulate reserves or run them down. Another dif-ference was that the state trading authority under thecaisse system was administratively not a part of thegovernment.

The state marketing institutions were estab-lished by the colonial powers with the aim ofregulating trade in primary commodities, and theyserved their purpose more or less satisfactorily dur-ing the colonial time (Williams, 1985). However, asin the case of other public bodies in developingcountries, their performance after independencedeteriorated over time. They became large bureauc-racies, influenced by politics, and increasinglyinefficient in their designated functions. All this wasreflected in the high cost of their operations, which,given the way the system worked, was borne largelyby cocoa farmers. Among the major producers, themarketing costs and taxes were seen to be lower inthe countries relying on free markets (viz., Brazil,Indonesia, Malaysia, and Nigeria) than those withmarketing boards or stabilization funds (Ruf and deMilly, 1990). The francophone institutions actuallybecame insolvent, as they were unable to build upreserves in the face of high costs of operations andlow world prices. Their increased reliance on theEuropean Union financing was basically what trig-gered their dismantlement. The World Bank wasanother major force behind this move.

The liberalization programmes aimed to im-prove productive efficiency through an alignmentof domestic prices with world prices and to givecocoa farmers improved prices, which were consid-ered to be low in relation to the f.o.b. price. Therewas, in fact, some contradiction between the twogoals since the increased production from liberali-zation would lower the world price, thereby loweringthe price the cocoa farmer actually received.

Evaluating the impact of market liberalizationmeasures presents a number of conceptual and prac-tical difficulties. There are significant differencesamong the four major producers as to the timing and

nature of the measures taken. Nigeria dismantled itsmarketing boards virtually overnight in 1986, largelyin response to domestic political pressures. Althoughit also devalued its currency at about the same time,Nigeria remained otherwise hesitant in deregulatingand liberalising other spheres of economic activity.

Ghana, on the other hand, started on a series ofeconomic reforms under the IMF/World Bank-sup-ported structural adjustment programme in the early1980s. It brought its fiscal situation under controland adjusted its exchange rate, and generally liber-alized the economy. After more than a decade ofneglect, cocoa production and exports started to re-cover as a result. A number of other policy measureswere taken in the early 1990s, notably, introducingprivate sector competition in domestic procurementand transportation and privatising Produce BuyingCompany, a subsidiary of Ghana�s Cocoa Board(COCOBOD). More recently, it started to allow pri-vate companies to export directly 30 per cent of theirdomestic purchases (Varangis and Schreiber, 2001).However, the country resisted successfully the pres-sure to abolish COCOBOD, though it did drasticallyreduce its work force and generally streamlined itsactivities in recent years. The government defendsCOCOBOD for ensuring the quality of Ghanaiancocoa, which enjoys a premium in the world mar-ket.

The measures taken in the two Francophonecountries � first, Cameroon, and later, Côte d�Ivoire� were more far-reaching. Cameroon started its re-forms in 1990, when it abolished its public marketingbody, called Office National de Commercialisatiiondes Produits de Base, or ONCPB. It also adjusted,among other changes, domestic cocoa price andmarketing margins to eliminate the need for subsi-dies and confined itself to stabilising price onlywithin the crop year. The liberalization process inCôte d�Ivoire was initiated in the mid-1990s andconsisted of increasing competition in the procure-ment and export of cocoa, improving transparencyand accountability of its stabilising fund � Caisse deStabilisation (CAISTAB) � while increasing the re-turns to farmers (Varangis and Schreiber, 2001). In1999, CAISTAB was abolished, and in its place amuch smaller agency with greatly diminished rolewas set up.

In short, market liberalization in some form orfashion had been proceeding in all of the four coun-tries of West Africa over a rather long period of time.


Also, the kind and extent of policy change differedrather widely across countries. Thus, while Ghanacontinues to have a marketing board, its overall eco-nomic system cannot be regarded as less market-oriented than (say) that of Côte d�Ivoire or Nigeria.Nevertheless, in evaluating the impact of liberaliza-tion, the researchers have focused basically on onefactor, i.e., the producer�s share in the f.o.b. price(See, e.g., Varangis and Schreiber, 2001, Gilbert andVarangis, 2003). They point out that the countriesfree of state marketing � Brazil, Cameroon, Indone-sia, Malaysia, and Nigeria � had significantly higherfarmgate prices as a proportion of the export price(70�90 per cent) than those of Ghana or Côte d�Ivoire(less than 50 per cent), which did have state market-ing in 1994�1995, the year to which the data relate.Furthermore, they attempt to show that the aboli-tion of the state marketing authority significantlylowered domestic marketing costs and taxes.

These two conclusions are actually interrelatedsince the producers� share in the export price doesdepend on the marketing costs and taxes. Indeed,the data in Gilbert and Varangis (2003) show thatthe observed differences in the producers� share waslargely due to the much higher implicit or explicittaxes in Ghana and Côte d�Ivoire; the marketing costsproper differed little across the countries covered(figure 4 in their paper). However, to the extent thestate institutions provided public services (such as,quality control and extension service), the reductionin taxes may not have been an entirely positive de-velopment. Indeed, there was a sharp deteriorationin the quality of cocoa exported by Cameroon and

Nigeria following the liberalization. But the mostserious weakness of the conclusion that the produc-er�s share improved following liberalization is thatit rests basically on the findings for just one year.Given that export prices are highly unstable, the pro-ducer�s share in any one year may not provide areliable guide to the actual situation. To remedy thisweakness, table 7 provides the data on the produc-er�s share in the export price averaged over 5-yearsegments, covering the 1981�2000 period.

In both Indonesia and Brazil, where there is nostate trading, the producer share in the export priceis indeed generally higher, though it shows consid-erable variation over time. The extraordinary highshares in Nigeria and Ghana during 1981�1985 arequestionable; the cause was probably their grosslyovervalued currencies. One thing, however, seemsclear that abolishing the marketing board in Nigeriadid not have an unambiguous impact on the share.In the case of Cameroon, the share was already onthe high side just prior to liberalization, but declinedto 62 per cent during the 1996�2000 period. Côted�Ivoire embarked on market reforms only towardsthe end of the 1990s, but it too shows that there wasan actual decline in the share, when compared to theearlier periods.

In short, there is no firm evidence that cocoafarmers actually benefited from market liberaliza-tion. The liberalization process seems to follow aset pattern. During the first year or so, a number ofprivate companies enter the cocoa trade, which tem-porarily pushes up producer prices. But this phase is

Table 7

PRODUCER PRICES IN PER CENT OF EXPORT UNIT VALUES

(Period averages)

Brazil Cameroon Côte d�Ivoire Ghana Nigeria Indonesia

1981�1985 72.8 55.4 55.1 113.8 120.9 78.9

1986�1990 68.6 70.9 59.9 37.3 96.1 74.7

1991�1995 78.9 85.7 65.6 48.2 101.2 84.7

1996�2000 82.0 62.1 50.5 52.4 89.0 82.6

Source: ICCO and UNCTAD.


followed by a period of consolidation and restruc-turing when the outcome for the producer dependson a host of other factors (Fold, 2001). In any case,the cocoa farmers are not concerned about their shareas such but the actual price they obtain and how itrelates to their productions costs, which vary con-siderably across countries.

The estimates of production costs are given intable 8, relating to the 1995�1999 period, which helpsto even out yearly variations. They have been de-rived by taking into account three factors: (i) theestimates of costs for producing one kilogram ofcocoa beans in 1989, provided by an ICCO study(Ruf and de Milly, 1990); (ii) an adjustment for theimprovements in yields between 1989 and 1995�1999, taking it as an approximation for productivityimprovements across countries (derived from theFAO database); and (iii) an allowance for the ef-fects of domestic inflation and exchange rate changesduring the period in question on the basis of the IMFdata. The resulting estimates do not take into accountthe costs of replanting and new planting and are atbest a rough approximation.

Indonesia�s production costs � at 36 US cents akilogram � is far and away the lowest. Though its

yields improved greatly during the 1990s (table 2),the catastrophic decline in the rupiah exchange rateconsequent to the Asian financial crisis of 1997 wasa much more important factor. On the other hand,the estimates for Ghana and Nigeria are on the highside, probably for the opposite reasons: domesticinflation was not adequately compensated by an ad-justment in the exchange rate, though both alsosuffered large declines in yields. Despite the weak-nesses of the estimates, it is probably safe to saythat Brazil and Nigeria have now become the high-est cost producers, though their reasons are different.In Brazil, the major cause for the rise in costs wasthe deterioration in yields following the outbreak ofa plant disease. In Nigeria, the neglect and generalmismanagement are the main factors: cocoa produc-tion is not a priority sector in that country and therehas been considerable migration of young working-age population out of cocoa areas.

Overall, the variations in yields across coun-tries appear to be the most important factor inproduction costs, where the market liberalization didnot have much impact. There is also no systematicevidence that the cocoa growers in countries with-out state marketing enjoyed a higher financialsurplus. On the face of it, Brazil, Ghana, and Ni-

Table 8

ESTIMATES OF COSTS OF PRODUCTION IN MAJOR COCOA PRODUCERS

Ratio of production costs to

Producer Export producer price export priceProduction costs $/kg price price (per cent) (per cent)

1989 1995�1999 1995�1999

Brazil 1.00 1.62 1.18 1.44 137 112

Cameroon 0.83 0.60 0.82 1.34 73 45

Côte d�Ivoire 0.66 0.60 0.68 1.36 87 44

Ghana 0.48 1.27 0.78 1.48 163 86

Indonesia 0.60 0.36 1.17 1.14 30 31

Malaysia 1.00 0.85 1.20 1.20 71 71

Nigeria 0.50 2.16 0.92 1.34 235 161

Source: See the appendix to this paper.


R2 = 0.3467

-100

-50

0

50

100

150

200

250

0 50 100 150 200 250

Ratio of production costs to producer price

Gro

wth

of o

utpu

t (pe

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geria operated on a loss, though in Ghana�s case,costs were lower than the export price by a significantmargin. The ratio of production costs to producer�sprice was roughly similar for Cameroon, Côted�Ivoire, and Malaysia.

Finally, although there are only seven observa-tions, there appears to be a weak correlation betweena country�s production costs to producer price ratioand the expansion of its output over the 1989�1999period, i.e., a country with a larger surplus over coststended to show a larger increase in its output(chart 3). The country with the largest output in-crease, Indonesia, was also the one with the lowestproduction costs. The next biggest increase in out-put occurred in Côte d�Ivoire, which amounted tomore than 50 per cent over the period with a cost/price ratio of 87 per cent.

B. Structural changes in the world cocoamarket

Dismantlement of government regulations andmarket liberalism were not confined to the cocoaproducing countries. There occurred significantchanges also in the industrialized countries � themain consumers of cocoa � that had a profound im-pact on the structure of the market and priceformation. The recent behaviour of internationalcocoa prices, which seems to break with the histori-cal trends, can be explained to a large extent by thesedevelopments. The change in the market structurehad in particular two consequences for the forma-tion of cocoa prices: (i) there was an evident declinein the level of cocoa stocks needed to carry on theprocessing and chocolate manufacturing activitiesin the European countries (the principal market), butalso elsewhere; and (ii) the world market price ap-pears to have become rather less sensitive to theforces of supply and demand.

There have been four developments that havehad a significant influence on the functioning of thecocoa market in recent years, even though theyevolved over a longer period of time. First, a fewlarge transnational corporations have now come todominate the cocoa trade (as in other commodities),having taken over, replaced, or merged with thesmaller companies engaged in trading physical co-coa. This development has benefited from thedramatic improvements in communications, which

enable individual companies to develop efficientmarket intelligence and facilitate the managementof large-scale transnational operations.

Secondly, the old distinction between tradingand processing companies has become blurred, asmost large trading companies are now also engagedin cocoa processing, sourcing beans directly fromexporting countries to take advantage of the scaleeconomies in transport, storage, and processing. Thisoccurred because the large chocolate manufacturersdecided to hive off the less profitable processing ofcocoa into intermediate products (cocoa liquor, co-coa butter, and cocoa powder) from their coreactivities. However, at the high-end, chocolate manu-facturers continue to do their own processing toensure quality. By the mid-1990s, some 70 per centof all grindings was done by the top 10 firms, withthe three largest cocoa-processing companies �Archer-Daniels-Midland (ADM), Barry Callebaut,and Cargill � dominating the market. They accountfor some 40�50 per cent of world grindings atpresent, and are expected to reach the 75 per centmark within a few years (Fold, 2001).

The third development is linked to the seconddevelopment. With the disappearance of the state-

Chart 3

RATIO OF PRODUCTION COSTS TOPRODUCER PRICE, AND GROWTH OF OUTPUT


dominated marketing structures in cocoa producingcountries, large transnational companies have, to aconsiderable extent, taken over also the exportingfunctions in the producing countries. According to arecent ICCO report (ICCO, 2001), some 90 per centof cocoa exports from Côte d�Ivoire are now han-dled by companies that are subsidiaries or have closelinks with the international companies engaged incocoa trade. Similarly, in Sulawesi � the cocoa pro-ducing area of Indonesia � there were some 60national traders engaged in cocoa exports as recentlyas 1998; by the year 2000, only two were left, therest having been taken over by foreign companies(Humphrey, 2002). This process of corporate inte-gration and concentration has also been driven bychanges in transportation that have resulted in econo-mies of scale. Cocoa is no longer being shipped inbags, but in large containers directly to end-users,which has considerably reduced handling costs atboth ends of the shipment.

Finally, there has been increased concentrationin the chocolate manufacturing industry, which isitself a result of globalization and increased impor-tance of brand recognition and marketing strategies.Following some 200 takeovers in the chocolate in-dustry during 1970�1990 period, only 17 firms havecome to control about half of the world market inchocolate, with five firms � Nestlé, Mars, Hershey,Kraft-Jacob-Suchard, and Cadbury-Schweppes �enjoying a dominating position (Fold, 2001). TheICCO (2001) study notes: �The process has involvedtakeovers of smaller companies by the large inter-national concerns, mergers to form larger combinedentities and incursion of the international compa-nies into new or developing markets� (p. 7). Thismirrors the developments on the retail side, wheremarket concentration has also increased, with largesupermarkets turning into basically renters of shelfspace.

The overall result of these developments hasbeen that cocoa producers face a monopsony situa-tion on the sale side (i.e., there are only a few buyersthat they can sell to). On the retail side of the fin-ished product, consumers face pretty close to amonopoly situation. The consequence of the in-creased concentration along the supply chain � trade,processing, and manufacture of chocolate � is thatthe procurement and provision of intermediate prod-ucts is not governed wholly by �arm�s length�arrangements, but by long-term inter-corporate

agreements, contracts or understandings. Apart fromthe issue of who benefited from these developments(taken up in the next section), they have implica-tions for both the need for carrying stocks and priceformation.

There have been two parallel developments thathave reduced the need for stocks. One, as there arenow much fewer firms at each level of the activity,the need for stocks to carry on normal business ac-tivity has considerably declined. This results fromthe fact that, in relation to their turnover, larger firmstend to carry stocks at a lower level than do smallerfirms. At the same time, traders and processors nowface a relatively stable and reliable demand from theirpartners and associates in business, which also re-duces the level of stocks to be held. The seconddevelopment is of a technological nature. As in othermanufacturing activity, chocolate manufacturershave started to rely on modern management tech-niques and practices to reduce their costs, in particular,the adoption of the just-in-time inventory manage-ment practice, where supplies of inputs are obtainedas required in manufacturing. Within Europe � thebiggest market for chocolate � a handful of proces-sors (mostly based in the Netherlands) have deliveryvehicles working virtually round-the-clock, respond-ing to the demand from the manufacturers all overthe continent.

The decline in the requirements for stocks byitself could be an adequate explanation for the gen-erally depressed prices in recent years. Throughoutthe 1990s, the stocks-to-grinding ratio remained inexcess of 55 per cent, compared to the long-termaverage of roughly 40 per cent for the four decades,1961�2001. The ratio declined during the 1995�1999, but it did not fall much below 50 per cent.Thus, there appear to be two factors at play in keep-ing the cocoa price low: the stocks have been athistorically a very high level in recent years, whilethe need for stocks for carrying on business has alsodeclined quite substantially. The result is that thereis a large overhang of unwanted stocks that has con-tinued to keep cocoa prices depressed.

The question then arises as to why the stocklevels have not been adjusted downwards, which isto say why cocoa supplies have persistently out-stripped demand, despite low prices. There wascertainly some influence on the output, in that it hasremained more or less stagnant at about 2.8 million


tons since 1995. However, the key is the behaviourof individual producers, which has been sharply dis-similar. Overall, production from the seven majorcocoa producers rose by less than 15 per cent be-tween 1990 and 2000. However, two countriesdominated the expansion: Côte d�Ivoire and the low-cost Indonesia together accounted for virtually theentire increase (63 per cent and 35 per cent, respec-tively), while the relatively modest increases inGhana and Nigeria just about offset the declines inBrazil and Malaysia.7 It was seen earlier (table 8)that, despite low world prices, the production costsin Indonesia particularly but also in Côte d�Ivoireallowed producers a significant margin.

In short, there continued to be producers whowere willing to supply cocoa at the low price. Theincreased productivity could partly be the reason,but, as seen earlier, rising yields and improved pro-ductivity did not occur everywhere in the cocoaproducing areas. A major reason must have been thatsmallholder farmers accepted a sharp decline in theirincomes rather than moving out of cocoa produc-tion. In some countries, the depreciated exchangerates and depressed wages helped the process. Thereis, however, very little information on wages andincomes earned by cocoa growers. According to onestudy for Côte d�Ivoire (Bonjean and Chambas,2001), there is evidence of increasing poverty anddeclining incomes in cocoa producing areas.

Before concluding this section, it is necessaryto consider one other factor that has sometimes beenheld responsible for falling cocoa prices. This re-lates to the role of the so-called terminal market, i.e.,the market for commodity futures. Since producersnow rely on private traders rather than state authori-ties, the bulk of cocoa sales have shifted from theforward market to the spot market. The result is thatphysical sales activity is concentrated only in a fewmonths. The state marketing authorities used to relyon forward contracts so that they could offer a guar-anteed price to local producers. However, thisdevelopment might have increased the volatilitywithin the crop year rather than pushing down thelonger-term prices. Similarly, the dramatic rise inoptions trading and the emergence of commodityfunds may (or may not) have increased price vola-tility, but are unlikely to have affected the marketfundamentals.

III. Revisiting the generic issues

Cocoa is a representative commodity: its worldmarket price is highly volatile and has been on adeclining trend, and the producers do not appear tohave benefited from the technological and other pro-ductivity enhancing improvements, whether in theirown countries or along the value chain. These havebeen perennial problems, but the neoliberal policieswere not aimed at dealing with them. Some propo-nents of neoliberalism felt that the commodityproblem could not or should not be addressed, as itwas a market outcome, while others believed thatfreely functioning markets would somehow tacklethem. The search for solutions has now become moredifficult, for it must be carried out in an environ-ment where there is widespread suspicion of publicaction and institutions. In particular, there is littlesupport today for a revival of international commod-ity agreements or re-establishment of state marketingauthorities. Nevertheless, an attempt is made hereto revisit the generic issues from a perspective thatis generally lacking today.

A. Price instability

In dealing with the issue of volatile markets,the measures designed to stabilise producers� incomeshould be distinguished from the issue of price sta-bility. The STABEX is a well-known example of ascheme designed to provide compensation, on an ex-poste basis, for unforeseen export earnings shortfallsto a number of African, Caribbean, and Pacific (ACP)countries under the various Lomé Conventions onEU-ACP cooperation. The IMF�s Compensatory Fi-nancing Scheme (CFS) was also designed to provideshort-term financing as balance of payments supportto producer countries that faced adverse devel-opments in their export markets. Neither of thetwo schemes is currently operative. STABEX wasabandoned when the last Lomé Convention was ne-gotiated, although thought is now being given to itsrevival in some form. The main reason why the CFShas been little used over the years is that the financ-ing under the scheme is contingent on the countryconcerned being able to satisfy the IMF as to thetemporary nature of the price fall, a condition that


primary producers have found difficult to fulfil.Funds are not available if the price fall is seen asfollowing a secular trend.

With respect to price stability, a distinction canbe drawn between measures that aim to stabilise pro-ducer prices within producing countries, as wasattempted by the state marketing authorities, andmeasures that stabilise world market prices, as wasintended under the early International Cocoa Agree-ments (ICAs). At the national level, the goal of pricestability can be either short-term, i.e., confined tostabilising intra-year prices, or longer term, cover-ing a few years.

Along with the abolition of the state marketingauthorities, the effort at stabilising producer priceswas also abandoned. As a result, there is evidenceof increased price instability. It was earlier noted (ta-ble 4) that the export prices during the 1990s hadbecome more volatile in Cameroon (without the statemarketing authority), while Ghana experienced theopposite. Gilbert and Varangis (2003) show that theproducer prices, following market liberalization,became considerably more volatile in Cameroon,Côte d�Ivoire, and Nigeria, though not in Ghana, theonly country that still keeps its marketing board.

The only recent initiative to address the con-tinuing problem of price instability has come from afew experts in the World Bank and UNCTAD(though so far without institutional endorsement),promoting the idea of �market-based risk manage-ment� instruments (See, e.g., Dehn, 2000 and Larson,Verangis, and Yabuki 1998). Insofar as hedging in-struments are concerned, there is nothing new in theproposal, as traders have for a long time been hedg-ing themselves against price uncertainty through thefutures market. Traders with physical stocks of acommodity routinely protect themselves againstprice decline, by selling futures contracts. Thus, ifthe price actually declines, they can recover the lossby buying back futures contract; the opposite oc-curs if the price rises. In short, a hedged trader�sgains or losses in the physical market are offsetthrough losses or gains in the futures market.

Where however the new proposals differ is intapping the interest in options trading on the part oflarge commodity funds. Options trading can be amore attractive instrument against uncertainty thanstraightforward hedges, for they enable traders withstocks to protect themselves against a price fall with-

out forgoing the possibility of taking advantage of arising market. This is done by buying a put option,giving the trader the right to sell the product at aspecified price, which is exercised if the price de-clines. The payoff on the bet turning out favourablecan be quite considerable, unlike the ordinary hedgewhich basically offsets gains or losses. But severalthings need to be considered. First, the use of optionsand hedges as protection against price uncertainty,like any insurance, has a cost, which is directly pro-portional to the risks involved. The cost of options,as indeed of ordinary hedges, tends to rise both withthe length of time covered and with the market�svolatility. These instruments are therefore useful onlyfor covering a relatively short period of time (aroundthree months), without the cost becoming prohibi-tive. To state the obvious, these instruments, likeconventional hedges, simply offer protection againstprice uncertainty; they do not deal with the volatil-ity itself.

Secondly, options are a particularly risky in-strument if they end up being used as bets on themarket behaviour, i.e., the risk of a hedger turninginto a speculator. Options trading is notorious for itsvulnerability to irregularities of all kinds. There havebeen many instances where the institution engagedin options trading has been rendered bankruptthrough actions of a lone trader (UNCTAD, 2003,provides a useful list of avenues for fraud in trad-ing.) In short, adequate regulation and supervisionof options trading as well as high personal integrityof professionals engaged in trading would be crucialif the farmers are to be protected against misman-agement or fraud. These are governance require-ments that seem to go well beyond the skills requiredto successfully manage a state marketing authority.

Finally, individual cocoa farmers do not havesufficient means, size, or the expertise to purchasehedging instruments. The promoters of the idea dorecognise this problem, but some believe that, in theabsence of a state authority, the problem could beovercome by local institutions, notably, farmers�cooperatives. Cooperatives enjoy an appeal for avariety of reasons, but there are few examples indeveloping countries of success. A major problem iswith respect to their being established. Ideally, theyshould arise out of some grass-roots movement, butit seems unlikely that options trading would be highon the movement�s list of priorities. On the otherhand, state-sponsored cooperatives have their ownproblems, most serious being the question of own-


ership with respect to their functions and policies.In any case, there is still no assurance that the coop-erative would be of a size, financial strength, andcapability to manage options trading. All in all, thechances of a cooperative movement in any of theWest African cocoa producing countries becominga force capable of marshalling the needed expertiseand resources appear rather slim.

Nevertheless, hedges and options do have aplace in commodity trade. Given the recognition thatthe abolition of state marketing authorities createdan institutional vacuum, there is a place for stream-lined quasi-state bodies that are independent of thegovernment but are answerable to it for their per-formance. They are required in order to undertakesome of the neglected tasks, such as quality control,handling of storage and transportation, and researchand extension service. There is also a need to takeadvantage of buyers� need for insurance against priceinstability, which should result in sharing, if not com-plete elimination, of the cost of a hedge. Providedthere is adequate oversight and regulation, thesebodies could be allowed to use hedging instrumentsto facilitate their management of stocks and tradingactivities. The financial performance of the old mar-keting authorities could conceivably have beenimproved with greater, but judicious, use of suchinstruments.

With respect to stabilising world prices, it seemsunlikely that a mechanism would emerge in the fore-seeable future. The memory of the past cocoaagreements� failure at price stability is too fresh andthe industrial countries have no interest in a mecha-nism to stabilise prices. As Gilbert (1996) put it: �Thecommodity agreement movement is effectivelydead� (p. 1).8

The ICAs suffered from problems common toother commodity agreements. The earlier agree-ments, as noted, relied on buffer stocks to keep themarket price within specified ranges, but there wereno stocks that could be released to arrest the steepprice rise of the 1970s while the situation was justthe opposite when the stipulated stock level was in-sufficient to prevent cocoa prices from falling. A lackof adequate financing was a related factor that sty-mied the market operations under the third agreementthat came into operation in 1981. The matters werenot helped by the fact that the largest cocoa producer� Côte d�Ivoire � did not join the first three agree-ments, nor did a major consumer, the United States.

B. Possibilities for price maintenance

Price stabilization and maintenance are closelyrelated issues, for they both turn fundamentally onproducers� ability to regulate their supplies. Whilean international agreement might be unrealistic atthis stage, the prospects of regulating cocoa suppliesby the cocoa producers, either under the umbrella ofICCO or on their own, seem promising, even thoughthere are serious difficulties to overcome. In fact,the 1993 ICA contained a provision (Article 29) forproducers to organise production curtailment arrange-ments to overcome market imbalances. Similarly,the 2001 ICA, while not mentioning productioncurtailment, provides for coordination of nationalproduction policies (Article 34). This suggests thatat least those consuming countries that are signato-ries to the ICAs are not averse to measures to maintainprices. In fact, there is a vocal civil society in indus-trial countries that advocates for �remunerativeprices� for primary producers.

It is well recognized that primary products suf-fer from long periods when price remains below longrun costs, which causes severe hardship to produc-ers and difficulties for the government. When facedwith similar problems, the industrial countries, de-spite strong neoliberal ideology, have shown aremarkable degree of pragmatism, offering protec-tion as well as financial aid to agriculture or ailingindustry, justifying it on grounds of hardship to somedomestic group or unfairness of other countries� ac-tions. Primary producing countries can take a leaffrom this experience: if arrangements to regulateproduction or exports are not possible under an in-ternational agreement, producers could cometogether with the aim of improving on their own themarkets for their products. Such cooperation is alsoneeded for strengthening their bargaining positionvis-à-vis transnational corporations engaged in tradein commodities in question.

There have been a number of past attempts atproducers� alliance, most well known being theOPEC (the Organization of Petroleum ExportingCountries). Others have included coffee, tin, andnatural rubber. A cartel-like action was also tried inaluminium, a manufactured product, in the early1990s, to withstand the threat of supplies from theformer Soviet Union disrupting the market (Gilbert,1995). The experience of these alliances indicatesthat, for their success, there are at least two prior


conditions that must be fulfilled or at least substan-tially fulfilled. The first condition is that all majorproducers share a common interest and vision incontrolling production or exports so that a collec-tive action has sufficient support. The problem arisesbecause the costs of the action are borne by the alli-ance members (i.e., withholding production orexports), but the benefits are shared by all produc-ers. This problem of free ride can more easily betackled if there are only a few producers of the com-modity in question.

Secondly, a price level completely divorcedfrom market forces can only be maintained for a verylimited period of time. The bigger the differencebetween the price that the alliance members wantand the free market price, the more difficult it be-comes to maintain the target price. The payoff oncheating is directly proportional to this differenceand under pressure an alliance risks its breakdown.There is also the consideration that higher the targetprice, more likely would it be for non-alliancesources of supplies to emerge.

Cocoa appears to be an ideal candidate as faras the first condition is concerned: the number ofmajor producers is very small and there is a com-mon view that some degree of supply regulation isneeded. As seen earlier, seven producers account forvirtually the entire world output, of which three �Côte d�Ivoire, Ghana, and Indonesia � account forclose to three-quarters. Côte d�Ivoire is far and awaythe biggest producer and could enjoy the status of a�swing voter�, rather similar to the Saudi Arabia�srole in the OPEC. This means that its vote could bedecisive in situations where other producers are di-vided on a particular issue (Gilbert and Smit, 2003).

Four of the largest producers are in the sameregion and geographically more or less contiguous,which should make monitoring of production andexports somewhat easier. At the same time, two pro-ducers � Brazil and Malaysia � appear to have lostinterest in cocoa. Cocoa is expensive to produce inthese countries and is not particularly vital to theireconomic interests. Since basically large estates areinvolved, the switchover to alternative opportuni-ties should be easier.

Thus, if the three big producers � Côte d�Ivoire,Indonesia, and Ghana � were to agree on a schemeto regulate production and/or exports, it should notbe too difficult to get the other two producers,

Cameroon and Nigeria, on board. As far as Nigeriais concerned, it has neither the available land nor aparticularly favourable environment for cocoa pro-duction (Ruf and de Milly, 1990). At any rate, cocoais only of minor importance to that country, account-ing for less than 1 per cent of its total exports.Cameroon, on the other hand, has both land and suit-able environment, and cocoa remains a major export,close to 15 per cent of its export earnings. However,being a relatively small producer, it poses little threatto the big three and its needs or interests should notbe too difficult to accommodate.

There remains, however, the possibility of newcomers, as has happened in coffee, who could freeride the market. This cannot be ruled out but thisthreat may not be exaggerated. With a depressedworld market, cocoa is not a particularly attractivecrop for newcomers, considering that it takes sev-eral years before the investment starts to pay. Theimportant thing is that the producers respect the sec-ond condition mentioned above, i.e., they should aimat a price that can realistically be maintained anddefended. In any case, production or export regulat-ing mechanisms cannot be expected to last indefi-nitely; periodic revisions of the maintained price arenecessary if market forces are not to overwhelm thesituation.

In short, the success in managing productionto maintain prices turns essentially on the three larg-est cocoa producers. They do at present have internalpolitical problems to deal with, while also needingimprovements in their respective cocoa sectors(particularly, in Ghana, but also Côte d�Ivoire), butagreeing on each other�s share in the world marketneed not be an insurmountable problem. A commonposition among the key producers could alsostrengthen their bargaining position vis-à-vis thetransnational corporations that they must deal with.

C. Cocoa producers and the value chain

As cocoa moves from the farmgate to the portfor export and then on to the final consumer, it goesthrough both a process of handling (i.e., grading ofoutput, packaging, domestic transport, paperwork,trade finance, etc.) and actual physical processing,which consists at the earliest stage (usually carriedout by the grower himself) of drying the fruit and


preparing the beans, and later of producing the fin-ished product, usually in the form of chocolate.Talbot (2002) provides a stylised sketch of the valuechain for cocoa as follows:

cocoa pods �> �rest� �> �remove seeds��> ferment �> dry �> cocoa beans �>roast �> shell �> cocoa nibs �> grind�> chocolate liquor �> press �> cocoabutter and powder �> chocolate (alongwith the input of sugar and milk).

Basically, the commodity moves from thegrower to a collector or a village-level trader afterhaving been dried and fermented. The commodity isthen acquired by a national trader, which could be astate marketing authority, who does the grading andquality control before its being exported. In somecases � but only to a very small extent in West Af-rica and Indonesia � cocoa beans are processed intointermediate products (cocoa liquor, butter, or pow-der) for export. The product is then either taken overby an international trader or processor, who typi-cally has long-term arrangements with establishedlarge chocolate confectioners, or gets traded in theworld commodity market. It is then the chocolatemanufacturer who arranges the retailing of the fin-ished product. Cocoa generally constitutes less than10 per cent of the costs of manufactured chocolate.

The question arises, how various steps alongthe value chain are controlled and coordinated, es-pecially when the crossing of national boundaries isinvolved. In particular, the question arises as to howimprovements in productive efficiency get sharedbetween producers of primary products in develop-ing countries and final consumers in industrialcountries. In the case of cocoa, as for some otherprimary products, producers have been hit hard bythe depressed prices, but this has had little impacton the price of the finished product. This means thatcocoa producers have faced price declines withoutthe benefit of a commensurate increase in demandthat would have followed from a price decline inchocolate (Morisset, 1997). Thus, from the perspec-tive of economic advancement, the distribution ofvalue added between primary producing, develop-ing countries and the consuming, industrial countrieshas become no less an important issue than the leveland instability of the price.

The distribution of value added and the appro-priation of profit at each stage of the chain depend

on the market structure, the rules governing com-mercial transactions, and the corporate relationshipsthat develop at each level. In the case of agriculturalcommodities, in addition, the ecology, specificprocessing requirements (including phytosanitaryconsiderations), and the ease of mechanization,storability, and transport all play a role in structur-ing transnational commercial relationships (Talbot,2002). If atomistic competition prevailed (i.e., allsellers and buyers were so insignificant that theycould not individually influence the market price)and if the bargaining power was not dependent onagents� economic status, the market could be reliedupon to settle more or less satisfactorily the ques-tion of who gets what at different stages. However,in the case of primary commodities, that is far frombeing the case, and is one reason why globalizationand market liberalization are viewed with suspicionby those who have little control over how marketsfunction.

Smallholder cocoa farmers must sell what theyproduce at pretty much the price they can get. Theydepend on village traders for temporary finance, andthere are usually no more than one or two tradersthat they can go to. As the product moves to the portfor export, it goes through various handlers, none ofwhich operates in a competitive environment. In thepast, the state marketing authority enjoyed a monop-sonist�s position; today, the situation with respect toreward sharing between local agents and overseasmonopolies has become quite opaque. As the inter-mediate product moves to its final destination in theconsuming countries, the market structure is char-acterised by high corporate concentration. All in all,only a fraction of world cocoa supplies actually getstraded in the world market; an undetermined but largeportion is not traded on the basis of arm�s lengtharrangements.

In short, the cocoa value chain is held to be�buyer-driven�, i.e., it is the buyer � the internationaltrader, typically a transnational � who decides whereto purchase and process the raw material (Raikes etal., 2000; Talbot, 2002). A number of factors havecontributed to keeping cocoa producers� controlrather limited in the value chain. A major factor inincreased dependence on foreign companies has beenthe general deterioration of infrastructure (ruralroads, seaport facilities) and the disappearance oflocal capabilities in marketing and quality controlfollowing the abolition of state marketing authori-ties. This situation is in sharp contrast to the colonial


times, when the colonial powers invested large re-sources into building the local infrastructure as wellas state institutions only to further their trade inter-ests (Fold, 2001).

The evident unfavourable economics of pro-ducing intermediate products has been another factorthat has kept cocoa producers at the low end of thevalue chain. The process is highly capital and en-ergy intensive, while the intermediate products donot enjoy an advantage in transport over cocoa beans(ITC, 2001). Given these handicaps, the progres-sively high duties on processed products in theindustrial countries (table 9) would seem to be un-necessary, but they certainly make a bad situationworse. Certainly, the productivity-improving devel-opments in the industrial countries have not provedto be favourable to giving cocoa producers a bettershare in the value chain. For example, a supplier ina cocoa producing countries is just not able to sup-ply the intermediate products on a just-in-time basisto a chocolate manufacturer in Europe, even if allother handicaps were somehow overcome.

There are nevertheless a few examples of lead-ing chocolate manufacturers investing in processingcapacity in a developing country, especially in theprocessing of organic chocolate. In response to thepressure from civil society, transnational corpora-tions have started to show interest in �fair trade�(i.e., ensuring that cocoa is produced where envi-ronmental and labour standards are respected) andsigned a protocol at the ILO against child labour incocoa production, even though there is little evidencethat the problem is serious or widespread. Thesedevelopments may be deemed desirable from someperspective, but they are unlikely to help the vast

majority of cocoa producers. The problem is thatthese otherwise legitimate concerns serve only todivert attention from producers� immediate concernsand the pursuit of fair trade in practice has come tomean unfair trade for all but a few.

The conclusion from all these qualifications,however, is not that cocoa producers cannot improvetheir status in value chain. After all, two cocoa pro-ducers � Brazil and Malaysia � have built upconsiderable domestic processing capacity and im-port cocoa beans from other producers for processingpurposes. This happened, not as a result of the freelyfunctioning market, but through active governmentsupport and direction at an early stage. The avail-ability of local enterprise and existence of domesticdemand for chocolate were seen to be other factorsfavouring processing, though Malaysia did not ful-fil the latter condition (Talbot, 2002). Although othercocoa producers do have some processing capacity,they are at least for present handicapped for reasonsgiven above, and the examples of Brazil and Malay-sia may not be replicable. For them, an improvementin their position in the value chain could be realisedthrough a careful regulation of production and ex-ports to the world market as well as better qualitycontrol and investment in infrastructure.

IV. Conclusion

The real fault with the neoliberal policy pre-scriptions lies in the fact that they failed to targetthe fundamental problems of concern to the cocoaproducing countries. The problems they did address� improving productive efficiency and producers�share in the price � while important were not theones that preoccupied most cocoa producers. How-ever, a more serious consequence of neoliberalismseems to have been the creation of an intellectualenvironment of do-nothing, laissez-faire. Under this,any search for solutions to unstable and low primarygoods prices is dismissed as a waste of time. As such,the most important step to be taken to bring com-modities back on the trade-finance-developmentagenda is to challenge this mindset and open up thedebate to a freer exchange of ideas. Application offree market principles may very well be useful here.

Even within their limited, stated goals, themarket liberalization measures do not appear to have

Table 9

IMPORT DUTIES ON COCOAIN MAIN MARKETS

European UnitedUnion States Japan

Raw cocoa 0.5 0.0 0.0Intermediate products 9.7 0.2 7.0Final products 30.6 15.3 21.7

Source: UNCTAD.


been a resounding success. There is little evidencethat they helped to improve productive efficiency incocoa producing areas. Such increase in yields asoccurred in Cameroon and Côte d�Ivoire resultedfrom investments made before the measures wereadopted. In Nigeria�s case, there was an actual dete-rioration. Little attention was given to investmentsin infrastructure and delivery systems that wouldhave had a greater impact on raising productive ef-ficiency. Improving cocoa growers� share in theexport price was indeed a worthy goal, but here toothe results were mixed. In any case, the producer�sshare on its own provides little indication on thebenefits for the cocoa grower, but little interest wasshown in examining this matter in relation to pro-duction costs and the market price.

However, while they did not quite achieve theirstated objectives, the market liberalization measuresdo not appear to have done much harm either, at leastas far as cocoa is concerned. There is no evidencethat these measures increased price instability;equally, it would be wrong to credit them with theevident reduction in the price instability. The priceswere more stable during the 1990s simply becausethey had come closest to the bottom. Nor can themarket liberalization be held responsible for the de-pressed prices, but only if this paper�s conclusionthat the recent output increase had little to do withthose measures is held to be valid.

There is little question that the state marketingauthorities suffered from serious problems, some ofwhich were aggravated by the depressed cocoa prices

as well as a poor macroeconomic environment inthe producing countries. But it now seems doubtfulthat the remedy lay in abolishing them altogether.The counsellors of liberalization gave little consid-eration to revamping the state institutions beforedeciding on their dismantlement. Though far fromperfect, Ghana�s Cocoa Board offers an example ofthe kind of improvements that can indeed be made.

The need for a public body to assure cocoaquality and provide other public goods (market in-telligence, research, and extension) is now beingwidely appreciated. There is also the considerationof regulating cocoa output to arrest the continuingdecline in prices. If there is to be a producers� alli-ance, a public agency that can control exports,manage stocks, and regulate production would be asine qua non. Then, too, there is the question of im-proving the position of cocoa producers in the valuechain, where state action and promotion would bevital.

Finally, this paper dismissed the possibility ofa future international cocoa agreement that wouldinclude clauses to stabilise and maintain prices.Notwithstanding the inherent difficulties in manag-ing price bands and buffer stocks, we do not believethat there would be any support for such a schemein the industrial countries for the foreseeable future.But this should not stop the producers from explor-ing ways of managing the cocoa market on their own.The prospects for a producers� alliance in cocoa ap-pear at least as good as in natural rubber or coffee,though there remain other difficult issues to address.

20G

-24 Discussion Paper Series, N

o. 25

AppendixDerivation of cocoa costs of production

ESTIMATES OF COSTS OF PRODUCTION IN MAJOR COCOA PRODUCING COUNTRIES

PercentageProduction Per cent Production Adjustment Production Producer Costs in Export Costs in increase

costs change in costs factor for costs price per cent of unit value per cent of in outputUS$/kga yield/ha (1989 prices) inflationb (current prices) US$/kg prod. price US$/kg unit value 1989�1998

1989 Average 1995�1999

Brazil 1.00 -38.1 1.62 nac 1.62 1.18 137 1.44 112 -32.8

Cameroon 0.83 14.8 0.72 0.83 0.60 0.82 73 1.34 45 -0.2

Côte d�Ivoire 0.66 5.1 0.63 0.95 0.60 0.68 87 1.36 44 53.3

Ghana 0.48 -31.2 0.70 1.82 1.27 0.78 163 1.48 86 33.7

Indonesia 0.60 31.4 0.46 0.78 0.36 1.17 30 1.14 31 231.6

Malaysia 1.00 19.0 0.84 1.01 0.85 1.20 71 1.20 71 -72.7

Nigeria 0.50 -10.3 0.56 3.87 2.16 0.92 235 1.34 161 12.4

a The source for these data is Ruf and de Milly (1990).b This adjustment allows for the effect of inflation and exchange rate changes during the period.c For Brazil, the data on inflation and exchange rate changes are not available for the period covered.


Notes

1 The protection of agriculture in the industrial countrieswas taken out of the GATT-framework, and it continuesuntil today to be an area of controversy and hypocrisy inmultilateral trade negotiations.

2 President Jacques Chirac, speaking to the 22nd Summitof the Heads of State of Africa and France, Paris, 20 Feb-ruary 2003.

3 �Value chain� basically refers to the chain of value addedas a commodity moves and gets processed from thefarmgate to the final consumer.

4 The instability index has been derived by taking the av-erage of the deviations from the trend-line estimated bymeans of least-squares.

5 The volatility index for world price in this table is differ-ent from the one in table 3, as the data here relate tocurrent prices.

6 The table does not include the regressions without thetime trend, since those were consistently inferior to theones with the trend. This is suggestive of the influenceof longer-term factors that are influencing the price be-haviour.

7 This would appear to dispose of the hypothesis in Gil-bert and Varangis (2003) that the market liberalizationcaused cocoa production to increase and depress prices.Leaving aside Indonesia, the production increase occurredmostly in countries that did not liberalize.

8 The movement may be dead, but at least this author be-lieves that it is not yet buried. For one thing, the interna-tional commodity agreements were far from being a totalfailure. In virtually each case, the commodity agreementfailed for specific but different reasons. Secondly, thecommodity agreements never enjoyed the wholeheartedsupport of the consumers for rather narrow, self-interestreasons. And, finally, a comprehensive approach to thecommodity problem, covering all major commodities �as envisaged by Keynes or in UNCTAD�s Integrated Pro-gramme � was never tried.

References

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