Sweet success? A cocoa boost for West Africa's frontier markets

A look at what the upsurge in cocoa prices could mean for Côte d’Ivoire and Ghana, two of the leading cocoa-producing countries.

Author Leo Morawiecki Associate Investment Specialist, Fixed Income

Thanks to favorable weather conditions and the timely use of fertilizers and pesticides, cocoa production in West Africa, specifically the neighboring nations of Côte d’Ivoire and Ghana, is expected to rebound in the 2024–25 crop season.

Although down from the record high of April, cocoa prices remain very strong, with a remarkable 124% rise in 2024 – on top of the nearly 61% price rise in 2023 (Chart 1).¹
 

Chart 1. Global cocoa spot price (2021–present)

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Source: ICE Futures US continuous contract (month end-prices), November 2024
 

So, what lies behind this huge upturn, and what could it mean for the economies of Côte d’Ivoire and Ghana, the world’s two leading cocoa-producing countries, and their US dollar sovereign bonds in particular?

What’s driving the cocoa price surge?

Cocoa is a naturally cultivated commodity, so climatic conditions heavily impact its production. Due to climate change in recent years, major producing countries, including Côte d’Ivoire and Ghana, have seen more irregular rainfall patterns that have reduced output. With supply down, cocoa prices have inevitably gone up.

While adverse weather is the primary driver, other supply-side factors have also been in play. Generally, the various farming costs have been rising, owing, for example, to structurally higher prices for key inputs like fertilizers and pesticides. At the same time, with many cocoa-producing countries rightly seeking to tackle issues like child labor and unfair farmer wages, this has also had some cost impact.

Economic significance

Côte d’Ivoire and Ghana are the two leading global producers of cocoa beans, accounting for 39% and 16% of global output, respectively. Cocoa beans (and related products) also account for 18% and 11%, respectively, of Côte d’Ivoire and Ghana’s exports, so high cocoa prices benefit these two economies more than any other.
 

Chart 2. Global cocoa bean production by country

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Source: ICCO Bulletin No.2, 2024
 

Potential impact on sovereign bonds

There are two main channels through which high cocoa prices can benefit the hard currency sovereign bonds of Côte d’Ivoire and Ghana, which, it should be remembered, are foreign currency debt owed by these governments. Firstly, most of the cocoa is exported and paid for in US dollars, so higher prices tend to mean reduced current account deficits and more local dollar liquidity to make the dollar interest payments.

Secondly, higher cocoa prices should also entail higher tax revenues from the cocoa industry. This, again, should improve the government's ability to pay the interest on their bonds. All else being equal, to the extent that higher cocoa prices improve the credit standing and debt servicing capability of Côte d’Ivoire and Ghana, this should result in downward pressure on their bond yields and upward pressure on bond prices.

Industry factors limiting the cocoa boost

The all-else-being-equal caveat regarding the potential impact of higher cocoa prices on sovereign bond performance is critical since, in practice, at the country level, this is rarely the case. As noted before, the main reason for higher cocoa prices is reduced output. So, in practice, when assessing the boost from higher prices, the impact of reduced sales volumes also needs to be accounted for.

A key issue in most producing countries is that farmgate prices paid to cocoa farmers are fixed periodically and usually far below market prices. For example, despite the recent 45% hike, Ghana’s current farmgate price of $3,062 per ton is only about a third of the global market price.^2,1 A negative effect of this price difference is that it tends to encourage smuggling activity, a well-known problem in both Côte d’Ivoire and Ghana, and limits the industry’s tax revenue potential.

A further structural pricing-related issue to be aware of, at least in the case of Côte d’Ivoire, is that it predominantly engages in forward sales, contracting its cocoa sales up to six months in advance. Consequently, the economic and fiscal benefits of earlier periods of (market) price strength will be more delayed, and vice versa, for earlier periods of price weakness.

Bigger picture considerations

Industry-specific considerations aside, it should also be remembered that the economies of Côte d’Ivoire and Ghana are about much more than cocoa. For example, in the case of Ghana, its gold exports in 2023 were more than four times more than its cocoa exports.³ As such, changes in international gold prices (which have risen by almost 50% since the end of 2022) are also very important.

More generally, many other factors always influence investor risk perceptions and the performance of emerging market sovereign bonds. For example, domestically, there can be periods when political developments dominate, while externally, for most US dollar sovereign bonds, US treasury yield changes are invariably the most key short-term driver.

Final thoughts

We believe the recent upsurge in cocoa prices is a significant positive for the economies and sovereign bonds of the top two cocoa-producing nations, Côte d’Ivoire and Ghana. However, important local structural factors also tend to limit the passthrough of higher global market prices. Further, in the bigger picture, many other domestic and external factors always need careful consideration when assessing the outlook for sovereign bonds.

1 Based on Continuous Contract (i.e. spot) Cocoa price of US$9,425 per ton, as of November 29, 2024.
2 "Ghana raises cocoa farmgate price again." Reuters, November 2024. https://www.reuters.com/markets/commodities/ghana-raises-cocoa-farmgate-price-again-2024-11-09/.
3 "Total trade per commodity Type." Ghana 2023 Trade Report. Ghana Statistical Service, May 2024. https://statsghana.gov.gh/gssmain/fileUpload/Trade/Ghana%202023%20Trade%20Report.pdf.

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