Higher costs are also likely to hurt demand, which is already showing early signs of weakness. Global chocolate sales were flat in the quarter ended April after growing for eight three-month periods in a row, Barry Callebaut AG said in an earnings presentation this month, citing data from analytics firm Nielsen.
“The living income differential of $400 per metric ton significantly increases the cost of cocoa to every manufacturer and end-user, which has the potential to dampen emerging market consumption at current prices,” said Eric Bergman, a commodities broker at Jenkins Sugar Group Inc.
Trader Impact
The plan is also likely to hurt traders and processors, which will have to pay the living-income differential on top of the regular premium they pay in the physical market. Many will find it hard to have exposure to such high premiums over the futures as they aren’t usually able to hedge them, while others may struggle to pass on costs.
Barry Callebaut has already warned that while it agrees with the principle of what Ivory Coast and Ghana want to do, the move will result in higher costs for cocoa butter and powder, products of bean processing, staring in 2020.
“Margins are tight,” Judy Ganes, president of J. Ganes Consulting, in Panama City, Panama, said, adding it was already “tough enough to pass cost increases along.”
If history is any guide, the nations are likely to struggle with their attempt to control prices. Unlike OPEC, which exerts its power by controlling supplies, Ghana and Ivory Coast want to prop up prices. An attempt to boost prices by banning sales in 1987 by then Ivorian president Felix Houphouet-Boigny only caused them to more than halve by the time the embargo ended in 1989.
“Any time producer groups attempt to control the market and establish minimum prices, it fails and the market is in worse shape after,” Ganes said. “My concern remains the foreseen consequences that price support mechanisms lead to even greater oversupply and ultimately depressed values.”
Bloomberg News.