70 percent of the world’s cocoa is produced in Africa. The two biggest African players dominating the market are Cote d’Ivoire, which accounts for 40 percent of the worldwide volume output and Ghana, which represents about 20 percent of the total output.
- Definition / Scope
- Market Overview
- Market Risks
- Market Drivers
- Market Restraints
- Industry Challenges
- Pricing Trends
- Regulatory Trends
- Other Key Market Trends
- Market Size and Forecast
- Market Outlook
- Distribution Chain Analysis
- Competitive Landscape
- Key Market Players
- Strategic Conclusion
Definition / Scope
Cocoa tree is scientifically known as Theobroma cocoa that grows in tropical areas between 15 and 20 degrees latitude north and south of the equator. After extraction from the pod, cocoa seeds are fermented and sun-dried. A cocoa producing tree can give on average 0.5 to 2 kilograms of seeds each year.
Cocoa beans are distinguished into three types as:
- Common grade: Forastero cocoa comes under this category which is originally grown in the high Amazon region but not predominantly grown in Africa. It accounts for roughly 80% of the global cocoa bean production.
- High grade: The high-grade cocoa bean is technically referred as Criollo cocoa originated in Venezuela while mostly grown in Ecuador and Peru these days. This variety represents about 8 to 10% of global cocoa production.
- Specialized grade: Trinitario cocoa is a specialized category of bean harvested primarily in Trinidad however it is now grown in Ecuador, Nicaragua and Costa Rica. It constitutes nearly 10-15% of world output.
Cocoa possesses a peculiar taste and color and mostly used in chocolate as cocoa butter, cocoa liquor, or sweetening agent. The edible seeds contain a nutritional value for protein, carbohydrates, fat, and fatty acids.
Once the cocoa fruits are harvested, the seeds are separated in the primary processing stage where fermentation and drying up of cocoa beans occurs under quality inspection. Then the next step involves the blending of beans. After that, beans are cleaned, winnowed and roasted sequentially. Next stage occurs by grinding the beans to make the final product.
The finished product of cocoa beans may come in the form of either liquid or semi-solid butter or the solid cocoa powder depending on the market demand. Finally, these finished products are stored in a warehouse and transported in the demanding market.
The backward value chain involves the market for cocoa cultivation whereas forward value chain covers the market for cocoa consumption. The cocoa cultivation market is situated mainly in Africa, Brazil, and Mexico. There are more than 35 countries that grow cocoa.
Cocoa beans after finished product are exported mainly to the European market such as Italy, Spain and also to the USA. The demand and price for cocoa are determined by the future market in London and New York.
Globally, cocoa production reached 5.2 million tonnes in volume in 2017 recording an 11.64% yearly growth from 2016. Nearly 70 percent of the world’s cocoa is produced in Africa.
The two biggest African players dominating the market are Cote d’Ivoire, which accounts for 40 percent of the worldwide volume output and Ghana represents about 20 percent of the total output. In 2017, Cote d’Ivoire produced 24.5% more cocoa than in the previous year totaling just above 2 million tonnes.
Similarly, the production volume for Ghana reached 883 thousand tonnes in the same year and that of Nigeria totaled 328 thousand tonnes. Cameroon produced 295 thousand tonnes of cocoa bean in 2017, an increase of 2% from 2016. The African cocoa industry employs more 2.2 million farmers.
The EU is the world’s largest importer of cocoa beans, responsible for over 60% of global imports. The Netherlands is the top importer with 25% share in total imports followed by the USA that constitutes 13 percent of the total global imports. Germany ranks third with 11% share and Belgium’s share in world cocoa import records 9.8%.
Ivory Coast and Ghana don’t have dairy and sugar industries to compete with the main manufacturers and thus cocoa has to be traded globally. Therefore, the players in the production industry don’t have a competitive advantage when it comes to making chocolate.
Ivory Coast and Ghana combined produced 3.6 million tonnes of cocoa which represents merely 5.5 % of the chocolate supply chain at the consequence of deforestation.
According to the report, 10% of Ghana’s forest trees have been replaced by cocoa trees while Ivory Coast has lost its 23 protected natural forests replaced by cocoa farming. Still, the countries do not benefit from the absolute advantage in the Chocolate industry. This advantage is taken by a few global shenanigans by neglecting the relationship with cocoa growers.
Africa produces fewer than 4 % of global chocolate despite its large volume of cocoa production. The lack of cocoa processing companies to produce chocolate gives small players the weaker bargaining power hence the financial risk in forward integration.
After several years of bad weather conditions due to an EI Nino and other regional weather patterns, the cocoa farming in Africa was unfavorably hit and the production had fallen for many years. But during 2016-17, the weather has been exceptionally suitable for cocoa growth.
Extremely hot temperature without rainfall is unfavorable for cocoa production as it impacts the size and quality of cocoa beans to reduce. Bean size is calculated by counting the number of beans per 100 grams of cocoa.
The temperature above the average of 28 degree Celsius in Africa for a continuously increasing period longer 4 months hit the production adversely. The dry weather further causes cocoa beans prone to diseases. The import price of cocoa bean had declined heavily by 19.5% to reach USD 2,541 because of oversupply.
Moreover, there has been an increment of a large number of new cocoa farms set up in the protected forests over the past five years have started contribution over production though the impact of deforestation was neglected by government agencies over illegal licenses granted.
Also, a sector-wise focus on productivity-enhancing measures and farmer training in every company through their sustainable programs coupled with higher farm gate prices have led the growth in this sector. In Ghana and Uganda, a five-year, USD 73.2 million youth forward investment scheme has been initiated to help young people either to get a job or start a business on their own.
This initiative will target more than 200,000 unemployed youth. MASO scheme in partnership with Ghana Cocoa Board has further targeted to serve 10,800 additional youth to empower within the cocoa sector by educating, training, and connecting them with the global industry. Other training and uplifting initiatives have also been founded between leading global chocolate players such as Hersey’s and Nestle in the region.
Lastly, some sort of national policies to stimulate cocoa production has also seen an increase in output. The government has granted non-cocoa tree ownership to cocoa farmers allowing them to grow other trees in the farm and sell those trees in the form of timber so that they can generate an additional source of income.
Fragile liquidity within the Ivory Coast’s banking sector caused by the collapse of the top cocoa producers and exporters in Africa has hindered the exports.
The sharp fall in prices in the future market left many local exporters insufficient to pay bank loans and agree on export contracts. Data suggests that Ivorian banks were unable to recover outstanding loans amounting USD 349 million during 2016-17.
Overcoming language barrier for US businesses trading in an African market relating to business practice and technical standards is a critical challenge because of which the middle-men are grabbing the share of profit from the local businesses.
Other restraints include;
- Higher freight rates and longer transit times in transportation
- High customs clearance costs when importing from African countries
For instance, the shipping rate to Europe was USD 51 and to North America was USD 48. Though the price of beans fell by 40% in the global market because of greater supply, the import rate hasn’t been maintained proportionately.
The cocoa industry is facing a labor challenge since many farmers are switching to other sectors because the wage they get paid is significantly very less. Just two countries in Africa produce over 60% of all the world’s cocoa beans but these farmers make only about 5.5% of a global supply chain worth USD 100 billion.
This is even less as 15% VAT on sale of chocolate products is taken by the government. To be precise, a farmer makes only a little under USD 9 per day. And the dark side is that the farmers hadn’t even tasted chocolate before.
Issues like child labor, illegal planting in protected forests, smuggling, and disease affecting cocoa trees all compound the challenges facing the industry. 2 million children’s health condition is at risk from hazardous conditions such as spraying pesticides, lifting heavy loads, burning fields, and using sharp tools in cocoa farming in Ghana and Cote d’Ivoire. They neither not have access to primary schools nor get nutritional food to eat.
Poverty, limited education, and lack of government enforcement combined are the root causes of child exploitation in African countries. An estimated 20 children per 1,000 child labor are forced child labor working in cocoa farms. Cote d’Ivoire has lost 23 protected natural forests replaced by cocoa farms. Similarly, 10% of Ghana’s natural forests have been depleted by illegal farming.
During 2017-18, the price of cocoa has dramatically increased by more than 52% driven by a surge in demand and historically low price. As the product is traded in the future market the price remains volatile. Cocoa is listed in London and New York future market.
Historical prices for 12-months period drawn from London future market is illustrated in the figure. The price referred per 10 tonnes of cocoa.
The price started at USD 1811.73 in the first month of 2018. The price went up by USD 286.89 in March to hit USD 2098.62. It reached the peak of USD 2471.97 in May after two months gradual growth. After May, the price fluctuated for the last five months after mounting again in July equaling that of May.
The world market price for cocoa is published daily as calculated average of the prices for cocoa futures at the London and New York commodity exchanges.
The export price is regulated in Ghana and Cote d’Ivoire. The governments of both countries fix a farm-gate price for cocoa farmers. The fixed farm-gate price is announced at the start of the cocoa harvesting season and is maintained for the period of one year.
When the world cocoa prices increase during the cocoa harvest, revenues are saved in a stabilization fund to use for compensating farmers when price declines.
The market in Ghana and Cote d’Ivoire involves high government intervention. In Ghana, for example, the government is involved at all levels, except in providing financial assistance to farmers. In Cote d’Ivoire, the government has recently regained more control over the sector to set a minimum price and coordinates sales and quality.
The involvement of governments in non-regulated markets, like Cameroon and Nigeria, has decreased with the introduction of marketing reforms. In these countries, the role of governments is currently limited to collecting taxes, financial services, distribution. Similarly, in these countries, Public-Private Partnership (PPP) has emerged.
Other Key Market Trends
Child labor remains at very high levels in the cocoa sector. Research shows, an estimated 2.1 million children work in cocoa fields in Ghana and Ivory Coast alone. Structural poverty, lack of schools, and other factors are the root cause of labor exploitation.
No stakeholder is willing to eliminate the child labor with ground works and it only exists in the commitments made in papers.
Market Size and Forecast
Cote d’Ivoire exported goods worth USD 10.2 billion in 2016. The most exporting goods was cocoa beans representing 36% of total export followed by cocoa paste, which accounted for 10%. The cocoa crop of Ivory Coast, the world’s biggest producer, increased 24.5 percent to a record 2.03 million tonnes in 2017.
Exports increased by 23.3 percent to 1.9 million tonnes. The cocoa industry represented 16% of the GDP. Production of cocoa in Ghana increased by 3% in 2017 totalling 883,652 tonnes. In 2016, Cote d’Ivoire and Ghana combined exported 1.7 million tonnes of the cocoa bean. In Ghana alone, Cocoa export accounted for 16.7% of total USD 16.5 billion export in 2016.
The Netherlands is the world’s main importer of cocoa beans and the second-largest cocoa grinder. It imported 1.5 million tonnes of cocoa valued at USD 4,665 million in 2017. 90% of imports come from African countries.
The USA imported a total of 1.38 million tonnes of cocoa from African countries. Cote d’Ivoire and Ghana are the two largest exporters to the USA. The imports from Cote d’Ivoire were worth USD 895 million and USD 224 million in value was imported from Ghana. Nigeria exported USD 31 million of cocoa to the USA.
Germany is the second largest importer of cocoa in Europe with import volume lagging by 421,358 tonnes than the Netherlands. Despite the large volume gap in imports, the difference in dollar terms is just 91 million between these countries.
In Ghana, cocoa production is expected to surpass 2 million tonnes in 2020. The total production of cocoa in Ghana will be just below the production made by Cote d’Ivoire. Cote d’Ivoire will produce 2.2 million tonnes by the time.
There will be a dramatic increase in Ghana’s cocoa output at a rate of 100% between 2019 and 2020 while that of Cote d’Ivoire will be growing just at 7% between the same period.
Distribution Chain Analysis
Cocoa originates from the cocoa beans of the cocoa fruits, which grows on cocoa trees. Over 70% of the production of cocoa comes from Ghana and Cote d’Ivoire. 90% of the cocoa is grown on small family farms of 2 to 5 hectares, while just 10% comes from large plantations of 40 hectares. 90% of the revenue that families earn in Africa comes from the cocoa farm.
Cocoa harvesting is a very labor intensive that requires close supervision and care. Intermediaries buy the sacks of unprocessed beans and sell them to exporters. These are private enterprises. In some cases, government body like Ghana Cocoa Board (COCOBOD) also involves in the collection and transportation process.
International companies and national cocoa board take part in the processing and grind phase of cocoa beans. This process results in semi-finished goods either in powder form or in beans form.
Finally, the exporters transport the semi-finished product to the international market especially in the European market and then it is reached to final consumers in the form of chocolate or other edible product.
Chocolate manufacturing and cocoa processing are concentrated industries dominated by a small number of large multinational companies. Cocoa is produced by small farmers, more or less structured cooperative-type organizations or major groups.
Millions of small-scale cocoa growers sell their products through several layers of local intermediaries to a comparatively small number of large scale international traders, cocoa processors, and chocolate companies. Cocoa growers’ cooperatives could be a venue for growers to organize and command better prices, but at the moment they act as little more than a clearinghouse for farmers’ product.
Following a wave of corporate takeovers and mergers, more than 60% of the cocoa processing capacity is in the hands of just three companies mainly Barry Callebut, Cargill, and Olam while the four largest chocolate manufacturers Mars, Mondelez, Nestle, and Ferrero supply nearly half of global consumption
Key Market Players
The selection is based on the volume of cocoa sold globally.
- Cargill: Cargill is a licensed cocoa buying company in Ghana. It has acquired an official license from the Ghana Cocoa Board. The company buys cocoa beans directly from farmers which significantly reduces the money lost through middlemen. The company benefits with 35% of the total market share.
- Barry Callebaut: It is the world’s largest cocoa producers and grinders. The company’s sales volume for cocoa reached 2 million tonnes in 2017, an increase of 6.3 from 2016. It captures 25% of the market share.
- Olam: After acquiring ADM company it has become the third largest player in the cocoa industry. The company procures 950000 tonnes of cocoa beans annually or 20% of the total global production. Olam has produced a combined 2.06 million tonnes of cocoa and coffee in 2017. 95% of its cocoa beans are certified and has employed 184880 employees in cocoa farms in 2017.
- Kumankoma Company Limited: The company is a licensed entity that buys cocoa beans in Ghana. It has partnered with the Cocoa Abrabopa Association to ensure a greater share of profit that goes to farmers.
- Plot Enterprise Gh: It is a cocoa processing company in Ghan. Products manufactured by Plot enterprise Ghana include; cocoa liquor, cocoa cake, cocoa butter, and cocoa powder.
- Cocoa Processing Company Limited: The company was started in 1965 and has set up three factories. It has won many international awards for quality assurance. Its products include golden tree chocolate bars including Kingsbite, Oranco, Akuafo, Coffeechoc, etc.
- Armajaro Ltd.: It is a multinational company founded in 1998. In Ghana, the company is among the largest cocoa buying players trading around 80,000 tonnes of cocoa each year.
Around 40% of cocoa produced in Ivory Coast comes from protected areas. The cocoa is sold through the normal distribution channel, despite the government’s claims that it wants to stop illegal cultivation and the resulting deforestation. The reserve of 24,000 hectares barely contains any forest cover now.
More than 2 million children are exploited in the cocoa farms in Ghana and Ivory Coast alone. They lack primary education and food to survive.
Thus, the core challenge in cocoa production involves promulgating legislation in consuming countries, which are the home to almost all major chocolate companies to ensure that corporations that operate in those countries are compelled to respect human rights and environmental protection.
Overall, the market benefits from its strategic location and because of that, the production volume is surging by more than 20% annually.
- Market Concentration and Price Formation in the Global Cocoa Value Chain, SEO AMSTERDAM ECONOMICS, 2016
- Cocoa Barometer, 2018
- Agricultural commodity consumption in the EU – Policy Brief, 2018