Ghana’s cocoa production peaked at 581,000 metric tons during the 1964/65 crop season, making Ghana the world’s largest producer of cocoa, with 38 percent of world production. Production then plummeted, bottoming out in 1983/84 at 160,000 metric tons and a market share of 10 percent. Since then, output has steadily improved, although in 1998/99 it was still only two-thirds of its peak.
This section summarizes trends in Ghana’s cocoa industry in the last decade, as well as the reforms being implemented to modernize cocoa production and avoid further erosion of market share. The section focuses on the efforts made in 1998 and 1999 to reform the industry through a participatory process of consultation with farmers, traders, foreign importers, organizations of civil society, and the World Bank. As a result of these efforts, a medium-term cocoa development strategy was made public in April 1999. The section argues that the proposed reform strategy is promising, although somewhat cautious. Without urgent measures to expedite its implementation, the long-run success of the cocoa industry in Ghana could remain compromised.
Cocoa Trends in the Last Decade
During 1989–99, world cocoa production exhibited an upward trend, increasing on average by about 2 percent a year (Figure 4.1). World cocoa prices tend to follow roughly 10-year cycles, and the 1990s were no exception: the early part of the decade registered declining prices, whereas the later years witnessed steadily increasing prices. And in 1999 cocoa prices plunged back to levels close to the previous trough in 1992–93.
World Cocoa Production and Yields
Source: FAO Yearbook, 1999.In the 1970s and the first half of the 1980s, Ghana’s cocoa production fell dramatically as a result of excessive taxation and a lack of incentives. For example, in the 1983/84 crop season the share of taxes in cocoa export revenue was as high as 44 percent. However, output registered a steady, albeit slow recovery from 1986 onward, largely due to policy reforms aimed at restoring macroeconomic stability and farmers’ incentives. In 1999 Ghana’s share of world production, at 13 percent, was slightly higher than in 1994 (Figure4.2).
World Market Shares in Cocoa Production
Source: FAO Yearbook, 1999.Ghana’s main competitors performed considerably better during the 1990s. Côte d’Ivoire, today the world’s largest cocoa producer, increased its share of world production steadily from 31 percent in 1989 to 38 percent in 1999. Indonesia, the fastest growing producer during the decade, expanded its output at an average annual rate of 17 percent, increasing its world market share from 4 percent in 1989 to 12 percent in 1999.
Efficiency of production is a key factor determining market shares. During 1989–99 Indonesia and Côte d’Ivoire had yields per hectare that were two to three times those in Ghana (bottom panel of Figure 4.1). Their superior performance is explained mostly by the use of high-yielding varieties and better husbandry. However, higher yields by themselves do not explain why production grew faster in certain countries than in others. For example, Malaysia and Brazil had yields per hectare that were close to those in Indonesia and Côte d’Ivoire, respectively, but both lost significant market share during this decade. Brazil’s share fell from 15 percent of world production in 1989 to 9 percent in 1999, and Malaysia’s from about 10 percent in 1989 to 4 percent in 1999. The main problems in these countries seem to have been a profit squeeze resulting from declining cocoa prices, and competition from alternative opportunities for the use of factors of production, particularly labor.
An even more important factor in explaining relative performance seems to have been the underlying economic incentives, that is, production costs and domestic producer prices.10 Whereas export prices of cocoa are determined in world markets, the nominal price received by cocoa farmers depends mainly on costs related to marketing, extension services, and taxes.11 These costs vary markedly among producing countries, and the domestic price received by cocoa producers reflects these different cost structures (Table 4.1). For the 1998/99 crop, producers’ shares in the f.o.b. (free-on-board) price of cocoa were comparable in Ghana and Côte d’Ivoire but were much higher in other major producers, all of which had more liberal cocoa marketing systems than Ghana or, until recently, Cote d’Ivoire. Moreover, both marketing costs and taxes were higher in Ghana and Côte d’Ivoire than in any of the other five major exporting countries.
Distribution of Proceeds of Cocoa Exports in Selected Cocoa-Producing Countries
(In percent)
Distribution of Proceeds of Cocoa Exports in Selected Cocoa-Producing Countries
(In percent)
Country | Producer’s Share |
Marketing and Other Financial Costs |
Taxes |
---|---|---|---|
Brazil | 72 | 10 | 17 |
Cameroon | 75 | 10 | 15 |
Côte d’Ivoire | 43 | 23 | 34 |
Ghana | 45 | 21 | 34 |
Indonesia | 78 | 12 | 10 |
Malaysia | 91 | 9 | 0 |
Nigeria | 88 | 12 | 0 |
Distribution of Proceeds of Cocoa Exports in Selected Cocoa-Producing Countries
(In percent)
Country | Producer’s Share |
Marketing and Other Financial Costs |
Taxes |
---|---|---|---|
Brazil | 72 | 10 | 17 |
Cameroon | 75 | 10 | 15 |
Côte d’Ivoire | 43 | 23 | 34 |
Ghana | 45 | 21 | 34 |
Indonesia | 78 | 12 | 10 |
Malaysia | 91 | 9 | 0 |
Nigeria | 88 | 12 | 0 |
A comparison of export and producer prices between Côte d’Ivoire and Ghana during the period from 1988/89 to 1998/99 helps illustrate this point (Figure 4.3).12 Although Ghana’s cocoa is supposed to command a premium in world markets because of its high quality, Côte d’Ivoire actually obtained a higher average price than did Ghana in the early part of the last decade. This surprising result may be due to better timing of cocoa sales or better ability to negotiate high prices owing to Côte d’Ivoire’s greater market share. It raises doubts about the cost-effectiveness of Ghana’s quality controls and its strategy to sell cocoa for delivery later in the crop season– assuming that this is done to fetch higher export prices.
Cocoa Prices Received by Ghana and Côte d’Ivoire
(In dollars per metric ton)
Sources: Ghanaian authorities; IMF staff.1 Free-on-board basis.Producer prices in Ghana were consistently below those in Côte d’Ivoire until the 1995/96 crop year: they have been slightly higher since then. However, even in recent years it is not clear that the higher producer prices have translated into greater incentives to produce cocoa in Ghana than in Côte d’Ivoire. Costs of production are likely to be higher in Ghana than in Côte d’Ivoire because the Cocoa Board’s quality control requirements force farmers to invest more time in readying the crop for purchase. Moreover. Ghana may have been put at a disadvantage by the pattern of exporting cocoa in smaller batches later in the season, thereby making storage costs higher. Since yields are lower and quality controls stricter in Ghana, cocoa farmers there may still realize lower profits per unit sold than their counterparts in Côte d’Ivoire despite the premium fetched by Ghanaian cocoa. In any case, the premium paid for Ghana’s cocoa in international markets has tended to decline in recent years as chocolate manufacturers have developed new techniques to compensate for quality differences in cocoa beans.
Finally, the fact that producer prices were consistently higher in Côte d’Ivoire until 1995/96 may have led Ghanaian farmers to divert some of their crop across the Ivorian border, helping boost that country’s production statistics. Bulír (1998) estimated that smuggling may have reduced Ghana’s officially recorded supply of cocoa by as much as 40,000–60,000 metric tons, while similarly raising Côte d’Ivoire’s supply.
Marketing Arrangements and Early Reforms
Since the mid-1980s Ghana has pursued reforms aimed at reversing the decline in cocoa production. To encourage recovery, producer prices were raised by about 185 percent between the 1983/84 and the 1990/91 crop years, and inputs and extension services were made more available. Real price increases were achieved through a steady rise in the share of the export price paid to producers, from 25 percent in the 1986/87 crop year to 54 percent in the 1997/98 crop year. Moreover, the Ghanaian authorities seem to be closely following developments in cocoa marketing in Côte d’Ivoire and making sure that smuggling incentives are minimized. In fact, since the 1994/95 crop season, the distribution of cocoa export revenue among producers’ receipts, marketing costs, and taxes has been quite similar to that in Côte d’Ivoire (Figure 4.4).
Distribution of Cocoa Export Revenue in Ghana and Côte d’Ivoire
(In percent)
Sources: Ghanaian authorities; IMF staff.To achieve the targeted increase in the farmers’ share in cocoa revenue, the government had to take steps to increase the efficiency of the cocoa marketing and distribution system, including through reductions in the operating costs of the Cocoa Board. In 1987 the staff of the Cocoa Board was reduced by nearly 12,000, in part by limiting its role in road haulage and construction and maintenance of feeder roads. The board embarked on a program to further reduce its staff by about 5.000 during 1992–94. By 1990 the board provided no more than 10 percent of haulage, and the private sector and the railways had increased their participation. To further reduce marketing costs and allow the producers’ share of cocoa revenue to rise, the government, beginning in March 1992. permitted private traders to compete with the Produce Buying Company (PBC) in the local purchasing of cocoa.
A Participatory Approach to Cocoa Reforms
Following the recommendations of a 1996 study13 on the scope and pace of development of the industry, the government began the process of formulating its medium-term cocoa development strategy. The Ministry of Finance appointed a three-person committee for this purpose in early 1998. The committee was composed of representatives of the ministry (including the chairperson), the Cocoa Board itself, and a neutral person; its analytical work led to the establishment of a task force whose function was to draw the road map for the industry’s reform.
The task force, chaired by a deputy minister of finance, was composed of various stakeholders from both the public and the private sectors. It was divided into four working groups, each assigned the task of studying and reporting on one of the following aspects of the cocoa industry: production, research, and extension; marketing, processing, and quality control; infrastructure and finance: and taxation and pricing policy. The working groups, with the help of expert consultants, prepared analytical papers with recommendations for each area. These reports were submitted to the task force and discussed in a seminar in November 1998. The seminar was attended by various interested groups including farmers, researchers, Cocoa Board officials, extension agents, buying companies, processors, external trading agents, shippers, policymakers, and development partners. The reports of the working groups were analyzed by the task force and further modified during the discussion.
Following the seminar, a three-person technical committee was entrusted to synthesize the reports and recommendations into a consistent reform strategy for discussion at a national workshop. That workshop, chaired by the minister of finance and attended by a wider group of participants (about 160 people), met on January 22 and 23, 1999. Attending the workshop, in addition to those who had participated in the November seminar, were representatives of the various sector ministries, members of parliament (including opposition members), representatives of various political groupings, former chief executives of the Cocoa Board, external buyers and processors of cocoa, external donors, and delegates of various civil society organizations. Although opposing views were expressed, a majority of those attending, in particular the farmers’ representatives, opted for liberalization as the best way to keep the sector prosperous and competitive.
The final reform strategy, which was approved and adopted by the cabinet in April 1999 (Box 4.1), reflected the principles that the public sector should withdraw totally from marketing activities in the cocoa industry in the medium term but also that the transition should be managed cautiously. The public sector would continue to have a role in extension services, rural infrastructure, research, and quality control. The reform strategy also called for the establishment of a steering committee made up of major stakeholders, with assistance from a secretariat to implement the strategy.
The medium-term cocoa reform strategy covers all areas related to the industry’s development. An important part of the strategy was an increase in the producers’ share in the f.o.b. price of cocoa from 60 percent in the 1999/2000 crop year to 70 percent by 2004/05, an increase of 2 percentage points per year. This increase was expected to come about through a gradual reduction in cocoa taxation and improved efficiency in the marketing of cocoa. The latter, in turn, was expected to result from cost-cutting measures at the Cocoa Board (for example, transfer of extension services to the Ministry of Food and Agriculture) and the divestiture of marketing activities through the sale of the PBC.
In June 1999 the government announced that it would keep the nominal producer price for the 1999/2000 crop year at the level of the previous year—that is, at ¢2,250 per kilogram. Given the fall in world cocoa prices, this would bring the producers’ share in the free-on-board price of cocoa to 70 percent immediately, while lowering the share of cocoa taxation to 15 percent. However, the continued fall in world cocoa prices has cut government revenue sharply and will require a new approach to cocoa taxation in Ghana (Box 4.2).
Other reforms implemented in 1999 included the leveling of the field for licensed buying companies through equal access to prefinance and warehousing facilities and the offer for sale of the PBC in December of that year. The discounts provided to local processors on the purchase of exportable cocoa were abolished. The government is also merging the extension services of the Cocoa Board and the Ministry of Agriculture, although costs associated with the reorganization of these services, including retrenchment, remain an obstacle to the completion of the merger, and external assistance is being sought.
The Medium-Term Cocoa Development Strategy
The medium-term cocoa development strategy adopted in April 1999 was designed to improve the performance of the cocoa industry by increasing both production and the incomes of cocoa farmers (Ministry of Finance, 1999). The strategy deals with all activities related to the development of the sector. The main elements are:
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Production. Cocoa production is targeted to increase from an average of about 340,000 metric tons a year during 1992–98 to about 500,000 metric tons by the 2004/05 crop season. This increase is expected to be achieved through a competitive pricing policy; the introduction of modern production methods, including the use of high-yielding varieties; control of cocoa swollen shoot virus disease; and focused research and extension services. The extension services of the Ministry of Food and Agriculture and those of the Cocoa Board will be merged under the former. Cocoa research will be publicly funded, and disease control will be undertaken by a special project funded by donors. Production of seedpods and seedlings will be privatized.
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Marketing. It was envisaged that there would be no limit on the number of local buying companies, and that these companies would have equal access to the Cocoa Board’s warehouses and crop financing pending the sale of the Produce Buying Company (PBC). The privatization of the PBC in late 1999 eliminated the dominant position of the public sector in the domestic purchase of cocoa. The current monopoly of the Cocoa Marketing Company over the export of cocoa is to be gradually phased out starling with the 2000/01 crop, for which qualified private buyers will be allowed to export at least 30 percent of their purchases.
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Pricing and quality control. Getting producer prices right is at the core of the cocoa reform strategy. In addition to increases in producer prices, reform would entail abolishing price discounts to local processors on domestic sales of exportable cocoa, which have ranged between 11 and 20 percent; the local processors would also be allowed to import low-grade and cheaper cocoa for processing. Responsibility for quality control would be shared between the Cocoa Marketing Company and the local buying companies. The latter would be responsible for initial quality checks at the point of purchase, and the Quality Control Division of the Cocoa Marketing Company for the last quality check at the point of export.
Cocoa Export and Tax Revenue
Cocoa export taxes have long been an important source of government revenue in Ghana, providing on average about 15 percent of tax revenue during 1994–98. Ghana has so far not adopted an explicit tax on cocoa. Instead, the government collects the difference between the world price of cocoa and its domestic cost, which includes the amount paid to growers plus marketing costs.
As a share of the f.o.b. (free-on-board) export price of cocoa, cocoa taxes in Ghana have been generally higher than those in most other producing countries, ranging from 28 to 34 percent in 1994–98. A number of studies, such as Imran and Duncan (1988) and the Ministry of Finance (1999), have indicated that, to maximize revenue without giving undue incentives to smuggling, the optimal cocoa tax in Ghana should amount to 10–15 percent of the f.o.b. export price. Therefore, at least until 1998, it was clear that the export tax on cocoa exceeded its optimal level. In addition, one could argue that the cocoa industry was taxed at rates far in excess of other productive sectors.
The medium-term cocoa development strategy proposed to reduce the tax on cocoa gradually from 26 percent of the f.o.b. price in 1998/99 to 15 percent in 2004/05, In 1999, however, the price of cocoa in world markets plummeted, yet the government chose to keep the producer price unchanged. As a result, the tax on cocoa exports fell sharply; present estimates are that it will not exceed 11½ percent of the f.o.b. price in 2000.
From the 2000/01 crop onward, qualified licensed buying companies will be allowed to export at least 30 percent of their domestic purchases independently from the Cocoa Board. This would require the government to urgently revisit its strategy on cocoa taxes. First, the tax on cocoa would have to be changed from an implicit to an explicit tax, which should not exceed 10– 15 percent of the export value. Second, the government would need to make a decision on the modality of the tax. A specific tax is often recommended in this context but has shortcomings in the event of sharp commodity price changes. An ad valorem tax is appropriate as a general structure for taxing buying companies, and sufficient safeguards can be implemented to address the problem of underpricing. An ad valorem tax may be structured so that normal profit margins for farmers are not wiped out when world cocoa prices decline substantially. Alternatively, during a cocoa price boom, it may need to function as a windfall profits tax. These elements of the tax would support social policy by cushioning the impact of price fluctuations and stabilizing the economy.
Next Steps and Conclusions
Ghana remains significantly more dependent on cocoa for foreign exchange earnings and tax revenue than its competitors, and therefore more vulnerable to error in the implementation of its cocoa sector reforms. However, since the reforms have been formulated in a participatory way and enjoy broad support in the society, their implementation could be expedited to reap the maximum benefits. The objective of raising producers’ share in the free-on-board price of cocoa can be achieved without sharply reducing cocoa tax revenue. The early implementation of the other reforms, including the abolition of the Cocoa Marketing Company’s monopoly over exports, should help reduce marketing costs and thus cushion the sharp reduction in the cocoa tax expected in the next three to five years.
Several compelling reasons argue for a speedy implementation of reforms:
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The experience of Ghana’s competitors suggests that marketing costs can be reduced from their current level of 14–15 percent of the free-onboard price to 10 percent. The participation of the private sector in marketing (domestic and export) would foster competition and efficiency.
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Quality control has resulted in a premium for Ghanaian cocoa in the world market. However, this premium is declining, and it is not clear that it will continue to provide a net advantage in the future. In any event, importers increasingly carry out their own tests on the commodities they buy, irrespective of official certification. Therefore Ghana may have to review its strategy regarding quality control on the basis of whether or not it generates net benefits.
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Ghana normally ships cocoa later in the season than Côte d’Ivoire. thus incurring higher storage costs. Available evidence indicates that shortening the time between local purchases and shipments abroad is likely to result in a net profit for Ghana. Also, the reasons for the Cocoa Board to engage in cocoa storage operations should be reassessed, as the export price may not fully compensate the cost.
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The Cocoa Board has an arrangement with a large European cocoa processor to process cocoa beans and deliver cocoa in liquid form to chocolate manufacturers in Europe. Observers have criticized this aspect of Ghana’s cocoa marketing for its lack of transparency; it may be advantageous to Ghana to reexamine this type of marketing.
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A careful analysis of the advantages and disadvantages of forward sales and prefinancing of cocoa needs to be made. As private operators are allowed for the first time to export cocoa, it may be more difficult initially for these exporters to sell cocoa forward; it will take some time before private exporters establish a reputation similar to that of the Cocoa Marketing Company as a reliable counterparty for foreign importers. The reduction in the share of the crop sold forward could increase uncertainty for some producers, as well as for tax revenue and balance of payments forecasts. However, the negative impact of this uncertainty should not be exaggerated. After all, international markets are not dominated by forward contracts, and yet have continued to nourish.
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The financing of cocoa purchases and exports is another area deserving study. Liberalization of cocoa marketing means that private operators will need to find their own financing. This is likely to lead to a mix of external and domestic sources of finance, with a shift to more financing from the domestic banking sector. This in turn could imply a seasonal increase in interest rates in the absence of counterbalancing measures on the part of the government (or the central bank).
Although Ghana’s medium-term cocoa strategy is now clear, urgent government decisions are required if the strategy is to be implemented without delay. With the recent privatization of the PBC, the domestic purchase of cocoa is now completely in the hands of the private sector. With 30 percent of the 2000/01 cocoa crop becoming eligible for direct exports– without recourse to the Cocoa Board or the Cocoa Marketing Company–the government will need to decide on a range of issues. Among these are whether to replace the producer price with a reference price; whether to differentiate reference prices by the type, size, or quality of the cocoa; how to tax cocoa exports and by how much; what modalities of quality control will be most appropriate in the new environment; how crop purchases will be financed; how cocoa exports will be monitored; and how to ensure that cocoa exporters are fully informed about forward contracts and other practices that could be used to cushion them from excessive price volatility. The requirement to surrender foreign exchange from cocoa exports should also be eliminated and replaced by a repatriation requirement.
The authorities are encouraged to continue to use a participatory approach to resolve these issues, but also to keep in mind the urgency of these decisions for the country’s prosperity. Considering the gains made so far through deregulation, the government should be particularly mindful of taking a too-cautious approach to cocoa liberalization. Ghana is now the only major cocoa producer where the government still plays a central role in cocoa exports. Its cocoa industry also remains hampered by high marketing costs and low yields. This situation needs to change rapidly if cocoa is to remain a key contributor to Ghana’s prosperity.