GHANA – International buyers of Ghana’s cocoa have made millions of dollars upfront payments to the state marketing board, Cocobod, to secure supplies and avoid another season of heavy losses.
By the second week of November, when season-to-date arrivals reached 183,000 tons, these advance payments totaled approximatelyUS$550 million. Much of that cocoa has yet to be shipped.
Cocobod claims the system is functioning well, and farmers report they are being paid. However, industry opinions are mixed.
Traders are still owed up to 350,000 metric tons of cocoa for contracts from last season, which Cocobod failed to deliver, costing them at least US$1billion on their corresponding futures market hedges, according to Reuters.
Although Cocobod disputes this figure, it has acknowledged that contracts were rolled over and has assured traders that they will be honored this season.
According to a Reuters calculation, at current price levels, companies could lose an additional US$2,500 on their hedges for every ton of last season’s cocoa contracts that remain undelivered.
To cover all the roll-overs, analysts like Africa-focused commodities expert Tedd George estimate that a harvest of roughly 900,000 tons would be required.
This is 250,000 tons more than Cocobod’s own production estimate, which some in the industry already consider overly optimistic. “It’s a huge gap to fill, which means some traders and local processors may not get their beans this season,” George said.
To shield itself from losses and support farmer incomes, industry sources say Cocobod is requiring traders to buy additional contracts at near-record high spot prices to balance the significant price difference.
Companies have little choice but to keep buying since, for every ton of cocoa they can source at the low prices of last season’s unexecuted contracts, they reduce their exposure.
“There are all the ingredients for bad things,” said a cocoa fund manager, pointing to concerns over the new marketing model, an uncertain crop outlook, and next month’s election in Ghana, which could have major implications for the sector.
Cocobod is requiring companies to pay at least 60% of the value of their contracts upfront and pre-finance Licensed Buying Companies (LBCs), after deciding to bypass banks as their financier.
Previously, Cocobod would take on bank loans to buy farmers’ cocoa, then sell the contracts for the crop forward to international companies.
However, due to declining production and management decisions, the regulator did not secure syndicated financing to purchase this season’s crop for the first time since 1992. Instead, it is using the companies themselves to finance its activities.
Cocobod had initially planned to borrow up to US$1.5 billion but announced in August, just ahead of the new season, that it would not tap the banks. It said the new decision would help save US$150 million in interest payments.
To fulfill those contracts, Cocobod is counting on a strong production rebound, but traders worry it may not materialize.
Several traders said Cocobod is delivering one ton of cocoa to fulfil last season’s unexecuted contracts for every ton companies purchase at this season’s spot prices. Blending the old and new contracts likely makes the average price per ton around US$5,000.
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