Many cocoa growers in West Africa live below the poverty line, growing beans in only one or two hectares.
Chocolate makers and cocoa processors had agreed to pay the West African nations the LID of $400 a ton on top of the futures market, but after the pandemic slashed demand,
companies needed to cut costs to weather a second wave of lockdowns from Paris to Los Angeles.
Hershey in November took the unusual step of directly sourcing its cocoa via the exchange, as the premium charged by Ghana and
Ivory Coast made cocoa inventories that back futures contracts in New York more attractive. The move sent December contracts on ICE Futures U.S. to a record over March.
The countries retaliated by canceling all of the sustainability programs Hershey is involved in directly or indirectly, and said firms running programs on behalf of the Pennsylvania-based chocolate maker will also be barred from operating them.
The regulators also took aim at Mars Inc., saying the maker of Twix had migrated the bulk of its cocoa butter purchases from its traditional processors, buying from JB Cocoa and Guan Chong Berhad instead just to avoid paying the premium. Mars said it “categorically disagrees” with the allegations and highlighted that it was the first major manufacturer to support the LID.
The accusations are a further hit to the reputations of chocolate makers, which have come increasingly under pressure for their role in deforestation, child labor and poverty. Earlier this year, a report sponsored by the U.S. government showed that child labor had worsened a decade after the $100-billion chocolate industry pledged to reduce it. Hershey is an especially big name, as an American icon whose bars helped power U.S. soldiers across Europe during World War II.
In a Nov. 30 letter to Hershey, Ivory Coast and Ghana said the use of the exchange was a clear indication of the company’s intention to avoid paying the LID.
“The conspiracy and machinations by your company to evade the payment of the LID demonstrates your passive commitment to improve the incomes of three million West African cocoa farmers,” Kone and Aidoo said, adding that failure to comply with the orders would mean
companies could lose their licenses to operate in the countries.
Ivory Coast’s regulator confirmed the letters and the statement. Fiifi Boafo, a spokesman for the Ghana Cocoa Board, could not immediately comment when reached by phone.
The cocoa squeeze in New York may not be as bad for Ghana and Ivory Coast as the countries have argued so far. That’s because Hershey’s purchase, while big for an exchange delivery, is only a fraction of the countries’ total production. With New York prices much higher than London futures, which form the basis to which the LID premium is added, there’s now a bigger incentive for other
chocolate makers to buy again in the physical market, brokers and traders argue.
The spat is also a risk for Ivory Coast and Ghana, which still have a lot of their crops to sell, said Judy Ganes, president of J. Ganes Consulting who has followed markets for more than 30 years.
Ivory Coast and Ghana have in the past threatened to suspend chocolate makers’ sustainability programs, a tactic that in the past has worked. Still, market conditions are “vastly different” now, Ganes said.
“Our concern is that by cutting off industry sustainability programs, cocoa farmers will be negatively impacted as they will no longer receive the benefits provided by our on-the-ground programs as well as the price premium for certified cocoa,” Hershey said in its statement.
Shutting down the sustainability programs has “significant implications for cocoa farmers and local communities,” said Antonie Fountain, managing director at the Voice Network, which has called for more industry regulation. The group argues farmers need to receive about $3,100 a ton, up from $1,800 a ton now, according to the 2020 Cocoa Barometer.
“Whatever happened in the futures market in the past two weeks has been entirely legal, the question is whether these things should be legal or whether you should be able to force all
companies to pay a fair price to farmers,” he said. “Shutting down the sustainability programs is exactly the wrong thing to do because it hurts the farmer.”
The countries also accused Chicago-based cocoa processor Blommer Chocolate Co., which usually processes large amounts of beans for Hershey, of collaborating, according to a separate Nov. 30 letter sent to the Cocoa Merchants’ Association of America in which the countries withdrew their membership from the group.
Blommer didn’t return a request for comment.
The nations also said Olam International Inc., the third-largest cocoa processor, had pursued a strategy of reducing the amount of Ghana and Ivory Coast beans from its recipes. The Singapore-based trader reiterated its “strong support” for farmers and boosting their incomes, in line with the objectives of the LID. “As one of the largest buyers of cocoa from Côte d’Ivoire and Ghana, our commitment is unwavering and we continue to support and purchase cocoa from both countries,’ said Gerry Manley, head of cocoa at Olam.
The cocoa regulators also said that were reviewing their membership to the Federation of Cocoa Commerce in London and that they are “reconsidering the incentives and the licenses granted to members of the FCC which are directly or subtly rejecting LID.”
“Ivory Coast and Ghana might be sending a sending stern warning to the trade but they also need to be able to sell their cocoa of which they have plenty of,” said Ganes, who previously worked for Merrill Lynch. “This is a stare down for sure with gloves off and will be interesting to see who blinks first.”
Dear Reader,
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.
Digital Editor