On the ongoing cocoa boom and what it tells us about the current state (and future) of African agriculture
On the ongoing cocoa boom and what it tells us about the current state (and future) of African agriculture
Long relegated to the back burner, African agriculture — a sector that is critical for poverty reduction — is experiencing steady productivity decline and loss of labor. This must be reversed.
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I: We are in the middle of the biggest rise in cocoa prices ever. However, most West African farmers are only getting a fraction of the windfall and likely won’t be able to increase supply before prices fall.
Not all cocoa farmers are created equal. Due to the recent spike in global cocoa prices, farmgate prices in Cameroon and Nigeria (over $8000 per ton) are more than three times higher than in Côte d’Ivoire and Ghana (under $2400). The reason is straightforward: Ghanaian and Ivorian authorities set cocoa prices — a decades-long policy that’s designed to tax farmers, stabilize supply/prices, provide extension services, and enable farmers to plan ahead.
Cocoa is a major crop in Côte d’Ivoire (top export) and Ghana (3rd biggest export). Combined, the two countries produce about 60% of global cocoa output (other African countries account for another 10%). Interestingly, Cameroon liberalized its cocoa market in 1991, despite the crop being its second largest export. Cocoa is Nigeria’s leading agricultural export. However, earnings from cocoa are negligible relative to the country’s other commodity exports. Nigeria liberalized its cocoa sector in 1986 and abolished the state monopsony in a largely unsuccessful attempt to increase production. Yields increased in the short term, before declining and staying flat for more than a decade.
Most analysts expect the current price spike to last through next year, although it’s unclear how quickly prices will go back to normal levels.
Several factors explain the current supply shock. These include unusual weather patterns (heavy rains followed by dry spells), disease outbreaks related to weather and other environmental factors (especially black pod disease and swollen shoot virus), lack of fungicides, insufficient fertilizers, old trees with declining output, and increasing abandonment of cocoa for more lucrative short-term uses of land (like artisanal gold mining). The substitution away from cocoa to artisanal gold mining in Ghana and Côte d’Ivoire is a major policy failure that will prove hard to reverse. The chemicals used in artisanal mining typically render land unusable for agriculture after recoverable gold deposits are exhausted.
Farmers have little means to increase their earnings by increasing supply (restricting supply to push prices even higher might be a better bet). It takes 5 years for cocoa saplings to start producing pods. Furthermore, most farmers don’t have the money needed to invest in better tree varieties, fertilizer, fungicides, and overall farm management. Close to 90% of cocoa farmers in West Africa are smallholders producing less than 800kg per year — a fact that limits the economic returns to investing in higher yields.
Finally, cocoa farmers are about to be hit by a new regulatory burden from the European Union (EU), the biggest destination market for cocoa. After December 30, 2024, the EU will ban the importation of commodities like cocoa, palm oil, rubber, soy, coffee, and wood unless traders can demonstrate that their production didn’t contribute to deforestation or degradation of forests. Existing constraints on intensive farming on land already under cocoa mean that the net impact of the EU policy will be a downward pressure on production for the foreseeable future. I expect lax domestic enforcement and ineffective NGO-ization of certification mechanisms to be the other observable impacts of the EU ban.
This is not to downplay the problem of deforestation. The problem is real and needs urgent attention (preferably by helping farmers improve yields and profits). Declining yields have forced farmers in places like Côte d’Ivoire to put ever more land under cocoa production. The result is that the country has lost more than 85% of its forest cover since 1960, much of it to give way to cocoa farming. It’s unclear how a simple ban — as opposed to requiring cocoa farmers and/or commodity traders to pay for any new deforestation — will reverse this trend (its always a good idea to have a healthy respect for economic incentives).
II: African economies primarily export cocoa beans with little value addition, a fact that limits their share of the $120b global chocolate industry.
African cocoa producers predominantly export unprocessed cocoa beans — as opposed to powder, paste, butter, or chocolate. It took almost six decades for Côte d’Ivoire and Ghana to act on the fact that this isn’t optimal. Both countries recently announced plans to process up to 50% of their cocoa output before export.
However, little has been done so far to achieve this laudable goal. In particular, neither government has shown a serious commitment to tackling the structural barriers to a domestic commercialization of their respective cocoa sectors.
Consider the case of Ghana. Other than price stabilization, one of the most important functions of COCOBOD is to earn forex for the central bank. COCOBOD/CMC does this through sales to foreign commodity traders and by securing foreign loans against future sales (at times at a lower rate than the sovereign). Importantly, foreign banks typically don’t accept purchase agreements with domestic processors as collateral. Unwinding the externally-facing operations of COCOBOD would necessarily entail finding alternative forex sources.
For all the talk about local value addition, the Ghanaian government also maintains draconian taxes on local chocolate consumption and other processed cocoa products (up to 60%). Such high taxes disincentivize the creation of a local vertically-integrated chocolate industry that could one day go global.
As I have argued before, the problem isn’t necessarily the existence of entities like COCOBOD or the Ivorian Coffee and Cocoa Board. These entities have clearly had some success in maintaining their respective countries’ cocoa sectors. Yet there is need for improvement. The next step should involve intensive commercialization facilitated by policies aimed at capturing an ever bigger share of the $120b global chocolate industry.
The two obvious places to start are domestic value addition and commodity trading. Going from beans to processed products (all the way up to chocolate) should be a no-brainer — if governments can overcome the risks associated with unsettling the arrangements mentioned above. Taking on ruthless commodity traders would be a heavier lift. Trading requires sophisticated skills in finance, logistics, entrepreneurship, networking, and risk management that aren’t typically prized by African governments content with merely exporting raw commodities. Entering the trading business (preferably via public-private joint ventures) would begin to solve some of the financial constraints limiting intensive cocoa farming. It would also turn West African producers into global price setters and increase their leverage in efforts to get chocolate firms to relocate to the region. The often-cited problems of unreliable access to power, water, sugar, and milk are solvable if more cash from the global industry can remain in West African economies.
Some have argued that cartelization with assigned production quotas may be a way for cocoa producers to earn price setting powers and capture more value in the global chocolate market. However, this would only marginally improve producers’ bargaining power while keeping them firmly in the bottom rungs of the chocolate industry. Furthermore, it would be hard to undo the institutional legacies of inter-state cooperation on cocoa. Notice that the International Cocoa Organization (ICCO) includes both leading producers and importers of cocoa — imagine OPEC, but with oil importers having institutional power.
Given the prevailing global institutional setup in the cocoa sector it comes as no surprise that, historically, major cocoa importers like the EU, the United States, and Japan maintained 0% duty on cocoa beans but quickly escalate tariffs (up to 15%) for any processed cocoa products. Despite recent changes, the legacy of historical tariff barriers continue to shape supply chains and how we think about African agricultural exports. It is convenient to focus on corrupt/inefficient officials running monopsonies in Ghana or Cote d’Ivoire while ignoring the overall incentive structure they face. According to a report by Deutsche Welle (as of 2010):
While the import duties for unprocessed cocoa beans is rather small, the EU charges 30 percent for processed cocoa products like chocolate bars or cocoa powder, and 60 percent for some other refined products containing cocoa.
And the problems extended beyond cocoa:
In some cases, tariffs can reach up to 146 percent, for instance for some canned tropical fruit specialties, says Francisco Mari, an expert on agriculture and fishies at the German protestant development service, EED.
"There is a wide range. If Arabica coffee would be roasted in Africa, the import tariffs would be 100 or 120 percent," Mari said.
Of course there is little to be gained from moralizing about this imbalance. European governments have every right to enforce policies that benefit their firms, workers, and consumers. If African policymakers want a bigger share of the global chocolate industry they should focus on shifting the economic incentives faced by leading global chocolate companies and their consumers. It is as simple as that.
III: African agriculture remains insufficiently commercialized. Neither does it get state support like in other regions of the world.
Which brings us to African agriculture more broadly. Governments’ failures vis-á-vis “cash crops” like cocoa, coffee, tea, sugarcane, et cetera are multiple times worse when it comes to “subsistence” crops like cassava, maize, beans, and the like. The structural distinction between “cash” (tradable) and “subsistence” (tradable) crops mirrors the equally misguided differential policy approaches to “formal” and “informal” sectors in the wider economy. Cash/formal sectors typically get prioritized as far as policy and funding go with the understanding that they are supposed to operate under commercial logics. Subsistence/informal sectors languish in neglect, despite often supporting much bigger shares of the labor force and households across the region.
About 70% of Africans make a living in agriculture — with the vast majority in the “subsistence” category. Consequently, stagnant agricultural productivity directly translates into persistent endemic poverty in the region. It does not help that African governments have historically spent barely 4% of their budgets on agriculture, well below commitments to raise expenditures to over 10%.
The consequences of these policy failures were on display at this year’s Kuznets lecture at Yale (highly recommended) where Chris Udry presented some alarming data. Agricultural productivity in the region is declining at alarming rate (4-5% per year according to data from a sample of countries). The decline is driven by downward trends in both yields and labor-hours. Farms are losing labor to more profitable non-farm activities, but without a concomitant intensification of farming practices (e.g., through the use of intermediate inputs) by those left behind. This means that to the extent that there is an increase in output it is mostly due increasing farm size and some technology adoption at the margins.
Udry’s lecture provides new insights into the underlying drivers of the general trends that have long been summarized by people like David Ndii. For example, Africa’s agricultural households are becoming older and less educated, as younger and more educated people switch out of agriculture. Stated differently, Africa’s most productive farmers are selecting out of agriculture. In the context of the attitudinal and policy distinctions outlined above, this means that rural agriculture will continue to be viewed as “subsistence” and therefore neglected. Never mind that most African rural markets are powered by small-scale agricultural trades.
Another interesting insight was the fact that yield declines are concentrated near urban areas. In theory, this is not supposed to happen. Urbanization is supposed to create demand for intensive agriculture. The explanation for this empirical anormaly is that much of the urban food demand in Africa is met by imports — since 1996 food imports have averaged around 13% of total imports.
While there is some variation across the Continent (see above), it is quite clear that the region is lagging the rest of the world on agricultural productivity.
As a matter of policy, African governments should be spending more money and time on agriculture. Productivity gains in agriculture would have an immediate impact on household income and poverty rates. Reducing the cost of food would push down the cost of urban labor — through the channels of reduced wage levels demanded as food gets cheaper (e.g., according to some estimates Nigerians spend more than 50% of their income on food); and reduced demand for agricultural labor (and increased supply of urban labor) as more people are able to permanently leave agriculture.
The point here is not to advocate for wasteful agricultural subsidies as is common in many relatively wealthier countries (see below). Instead, it is a recognition of the need for state assistance in overcoming the many barriers to commercializing agriculture in the region. Such efforts should extend well beyond the so-called “cash crops” that principally target export markets (all crops are cash crops!) Whether a household is growing coffee, cocoa, maize, or cassava shouldn’t matter. All crops require policy support to increase productivity and turn farming into a channel for alleviating both rural and urban poverty.
State interventions to enable intensive commercialization of agricultural should also come with the understanding that some crops will require more support than others — including through monopsonies. However, the default policy posture should be in favor of greater liberalization and the promotion of farmer-controlled cooperatives to overcome any arising coordination failures. Ultimately, the goal should be to help farmers compete favorably in global markets.
Let’s be clear. The fact that African governments have simply given up, and are willing to live with consumers spending valuable forex on food exports — in countries where 70% of the labor force relies on agriculture — is symptomatic of deep policy failures across the board. This is not a case against food imports (trade is a two-way game!) Rather, it is a call to give the region’s farmers a fair chance to compete globally and benefit from productivity gains so incentivized.
Conclusion:
Most African countries missed the Green Revolution. This happened principally due to policy failure. Much of the region simply chose to neglect rural development as a basis for economic takeoff (economic neglect mirrored political demobilization and de-participation). Systems of agricultural research and extension services built in the 1960s-70s were left to atrophy — save for skeleton operations targeting “cash crops.” There were no serious investments in irrigation infrastructure. Fertilizer use stayed flat. The idea of annual improvements in seeds remained as foreign as it can get. Non-market interventions predominated. Commercialization was not given a chance.
There will be no leapfrogging of these policy failures. Urbanization without intensive agriculture will mostly result in ruralization of urban areas as households hedge by straddling town and country. Both farm and non-farm productivity will continue to suffer. Any land reforms that produce premature rural landlessness (i.e., before urban mass job creation) will be economically inefficient and politically disastrous. All this to say that even though developmentalist policies in the region should target a gradual decline in the share of the labor force in agriculture, the best way to get there will be via economic policies that reflect the realities of where most Africans live and work.
On the issue of agricultural productivity I know Norman Borlaug spent some time in Africa after his major work in South Asia was done. According to his fellow Green Revolutionary, M.S Swaminathan, Borlaug mentioned that amongst the African farmers he was allowed to work with there was eagerness to go modern but the lack of market size meant adopting those practices was pointless.
Akinwumi Adesina has also discussed the importance of growing Africa's value added sector not only for export but also for domestic consumption as well. Stagnant per capita GDP is a major barrier to reducing poverty and stabilizing the economies of Africa.
Really well researched, insightful and nuanced article, as ever. I haven't seen anything written, including in the Ivorian press (which covers the cocoa sector very poorly) on the potential impact of these current record world cocoa prices. Your headline of ''boom'' implies the record prices will really lead to boom times on the ground. We'll see in the new cocoa season, when I suspect we'll see a record minimum guaranteed price announced on 1 Oct, and a major boost to government income. The 1999/2000 cocoa liberalisation in Cote d'Ivoire is understudied and led to some of the lowest farmgate prices ever seen (plus massive corruption). I would note that the ''recently announced'' idea of processing 50% of cocoa beans dates back to before the Ouattara era, though it has been repeatedly restated. To be fair, progress has been made, and depending on the year, the country is generally the world's no. 1 for semi-processed cocoa (for technical reasons not necessarily something that creates many factory jobs, cashew is better for that).
Separately, I always think Cote d'Ivoire merits more attention as a country that has done more than most to build an economy on agriculture, hence world number one for cocoa and cashew, and high up there for cotton, rubber and palm oil. Local rice production has been steadily rising though still far short of the target of self-sufficiency. The abundance and variety of foods available at markets in the interior is notable. And overall the Ivorian economic story since 2011 has some remarkable elements (growth, roads, electricity coverage, schools).