Study Notes

Price Volatility - The Cocoa Market

Level:
AS, A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 30 Oct 2018

A recent in-depth article from the Financial Times made a significant point that, despite a recent recovery in the market, the price that Ghana cocoa farmers get for their raw produce is barely enough for them to cover their costs and that this is an important barrier in the challenge of securing sustainable growth and driving improved development outcomes in a lower middle-income country.

Cocoa is a cash crop for some the world's poorest farmers. Most cocoa is grown by smaller farms – according to the International Cocoa Organisation, 90% of world cocoa production originates from small farms.

Ghana is the second biggest cocoa producer in the world supplying nearly 20 percent of the raw cocoa beans that ultimately support a global industry worth $100 billion a year. But their exports amount to only one fiftieth of that - around $2 billion per year. Overall, cocoa producing and exporting countries such as Ghana and the Ivory Coast have been sharing less than three percent of money in the cocoa value chain which stretches from the cocoa plantation to retailing.

About 70 percent of the world’s cocoa beans come from four West African countries: Ivory Coast, Ghana, Nigeria and Cameroon. Ivory Coast and Ghana produce about 60% of the world’s cocoa – there are signs that these two countries want to increase cooperation in order to exercise more influence over the world market and secure a higher proportion of the value of cocoa products in the global economy. The key growth and development point re Ghana is that most cocoa beans are still exported raw. Only around 30% of the cocoa crop is processed into products which is where there is greater value added (profit) to be made.

Cocoa is estimated to contribute 7 percent of Ghana’s annual GDP but the vast majority of 800,000 small-scale farmers cannot survive without government financial support and the country remains heavily reliant on overseas aid and remittances to prevent more families falling into extreme poverty. Another big issue is the environmental impact that cocoa farming has on Ghana. According to the World Bank, Cocoa farming accounts for half of Ghana’s deforestation.

Macroeconomic background on Ghana

Ghana is a small open economy with floating exchange rate, high current account and fiscal deficits, low foreign exchange reserves (3.5 months of import cover) and high external public debt. It is a lower middle income country.

Selected contextual indicators for Ghana

  • Population millions 28.3 million
  • Gross national income (GNI) per capita (2011 PPP $) 4,096
  • Gross domestic product (GDP) per capita (2011 PPP $) 4,228
  • Human Development Index 140th
  • 10-year average annual GDP growth % 7.0
  • 5-year average FDI inward flow % GDP 7.8%
  • Unemployment rate % 2.4%
  • Gross fixed capital formation (% of GDP) 15.3%
  • Gini coefficient 0.42
  • Palma ratio 2.1
  • Working poor at PPP$3.10 a day (% of total employment) 25.7%
  • Child labour (% ages 5-17) 19.9
  • Employment in agriculture (% of total employment) 40.7%
  • Exports and imports (% of GDP) 90.6%
  • Net official development assistance received (% of GNI) 3.2%
  • Remittances, inflows (% of GDP) 7.4%
  • Skilled labour force (% of labour force) 24.8%
  • Research and development expenditure (% of GDP) 0.4%
  • Rural population with access to electricity (%) 66.6%

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