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Each day TFO Canada publishes a sample of trade news on the Canadian import market along with any new, updated or changed regulations and legislations regarding international trade; countries in which TFO Canada offers services and on the export sectors which it promotes.


Sweet like chocolate

Friday, June 09, 2017 > 10:43:35

Africa Law & Business

Ghana’s cocoa board has instructed a syndicate of banks to assist with an annual trade finance facility, demonstrating an ability to withstand the pressure of cocoa prices at a 10-year low, as Ivory Coast is also withstanding the commodity price changes.

Ghana’s Cocoa Board, otherwise known as Cocobod, has mandated a syndicate of banks to act as bookrunners for a USD 1.3 billion, pre-export, receivables backed trade finance facility, alongside Ghana International Bank, as initial mandated lead arranger, which together, form the arranging group for the facility.

The banks involved are the Netherlands’ Rabobank, France’s Crédit Agricole and Natixis, South Africa’s Standard Bank and Japan’s Sumitomo Mitsui Banking Corporation. The arranging group has launched into senior syndication, with the facility being fully underwritten by the group members, paying a margin of 65 basis points per annum over the dollar LIBOR rate.

The 11 month facility will be structured similarly to previous Cocobod annual trade finance facilities, the proceeds of which will be used to finance the purchase of the main crop of cocoa beans (and ancillary costs) for the 2017/2018 season commencing in October 2017, while also including a provision for the re-drawing from April 2018 to May 2018, of finance for the light crop. 

Cocobod is a statutory public board, established by the Ghana Cocoa Board Law in 1979, and acts as the pre-eminent state-owned company responsible for Ghana’s cocoa industry, with control over the purchase, marketing and export of all cocoa beans. Cocobod also undertakes research and quality control of the cocoa industry.

The 2014/15 financing round, on which intenrtional law firm Sullivan & Worcester acted, raised USD 1.7 billion, while Ghana raised USD 1.2 billion in a similar loan in 2013 and USD 1.5 billion in 2012. 

The new announcement came following the publication of a report by risk analysts Moody’s, which looked at the credit impact of a 30% drop in cocoa prices to a 10 year low on Africa sovereign nations like Ghana and regional neighbour Ivory Coast.

The report highlighted that a recent sharp drop in cocoa futures was significant but reflected its historical volatility, with leading cocoa producers like Ghana and Ivory Coast feeling the drop via deteriorating current account deficits, fall in government revenue that could inflate budget deficits, and slowing growth via falling household incomes.

However, it was expected that both governments would support the cocoa sector to offset the current impact of the shock on growth. In a statement, Aurélien Mali, a Moody’s vice president, and co-author of the report, said: “The 30% drop in cocoa prices will put pressure on all stakeholders in the cocoa sector, but particularly Côte d’Ivoire and Ghana, through the current account, fiscal and economic channels.”

That said, Mali noted, “Minimum farm gate prices have protected farmers in Côte d’Ivoire from the short-term fluctuation in prices, while Ghana's burgeoning oil sector will help to offset the impact on its credit profile.” 

Although Africa produces close to 74% of global cocoa, the continent accounts for only around 20% of the grinding process. Unlike manufacturers and traders that are concentrated in a small number of companies and enjoy higher bargaining power, farmers receive a very small share (6-7%) of the value distribution in the supply chain.

Household revenue is more exposed to the volatility in prices as the agriculture sector employs about two-thirds of the population in Ivory Coast and over 40% in Ghana.  

The impact of the cocoa price fall on the current account balance will be more significant for Ivory Coast than Ghana because cocoa exports accounted for around 43% of its total merchandise exports in 2015, compared to 24% in Ghana. 

Over the longer-term, growing demand for chocolate in developing markets suggests that low prices – although still possible – are unlikely to persist for many years. Although Switzerland, the United Kingdom, Germany and the United States remain the top chocolate consumers, these markets are already fully penetrated.

On a per capita basis, Switzerland annually consumes around 9.2 kg of chocolate and the average Western European consumes 4.7 kg, while consumption for China and India only stands at around 0.1 kg, indicating further potential for cocoa production to meet growing demand over time as those markets are likely to deepen.

In Ghana, Moody’s expects the current account deficit to improve to 6.3% of GDP in 2017 from 6.6% in 2016, amid higher GDP growth supported by new oil and gas field developments, while in Ivory Coast, Moody’s expects lower cocoa prices and higher investment-related imports will increase the current account deficit to 2.7% of GDP in 2017, from 0.6% in 2016 and compared to a surplus of 0.7% over 2014-15. Lower exports will also weigh on growth.

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