This abrupt shift in the marketing system, which has been operational for over three decades in the world's second-largest cocoa-producing nation, has considerably amplified the obligations of traders and processors in terms of financing and sourcing the crop.
In the past, Cocobod would obtain bank loans to purchase cocoa from farmers and subsequently sell forward contracts for the crop to international buyers. However, due to financial challenges stemming from reduced production and management choices, the regulator has, for the first time since 1992, opted not to secure syndicated financing for this season's crop. Instead, it is relying on the companies themselves for funding.
Cocobod asserts that this approach will reduce costs. Nevertheless, this transition introduces a new level of risk for private entities, the cocoa industry in Ghana, and the global chocolate market.
A small trader in Ghana remarked, "They have completely relied on private entities to handle everything."
Currently, the industry is aligned, but any further losses could prompt buyers to seek alternatives.
Poor harvests in leading producers Ivory Coast and Ghana drove global cocoa prices to unprecedented levels in April, while Cocobod discovered it had significantly oversold and could not fulfill its contracts.
Cocoa futures are once again increasing, which is likely to push up prices for holiday chocolates even more.
A cocoa fund manager expressed concerns, stating, "There are all the elements for negative outcomes," highlighting issues related to the new marketing model, an unpredictable crop forecast, and the upcoming election in Ghana, which could significantly affect the industry.
This fund manager, along with many other traders and industry participants interviewed by Reuters, requested anonymity due to the delicate nature of commercial relationships in Ghana.
Cocobod officials did not respond to a request from Reuters regarding their new marketing strategy and the industry's worries about the current crop.
LIMITING RISK
Traders are still awaiting delivery of up to 350,000 metric tons of cocoa from contracts from the previous season that Cocobod failed to fulfill, resulting in losses of at least $1 billion on their corresponding futures market hedges.
While Cocobod disputes the 350,000-ton figure, it has acknowledged that contracts were extended and has assured traders it will honor them this season.
However, that cocoa was pre-sold at significantly lower prices than current market levels. To mitigate losses and support farmer incomes, industry sources indicate that Cocobod is requiring traders to purchase additional contracts at near-record high spot prices to balance the substantial price disparity.
Companies find themselves with little option but to continue purchasing, as for every ton of cocoa they can acquire at the lower prices of last season's unfulfilled contracts, they are effectively reducing their risk exposure.
The head of cocoa for a prominent trading house remarked, "You are aware of your losses, but the extent of potential future losses remains uncertain."
A chart illustrating cocoa price trends over the last year.
As per a Reuters analysis deemed reliable by two traders, at the current price levels, companies could face an additional loss of $2,500 on their hedges for each ton of last season's cocoa contracts that are still undelivered. To fulfill these contracts, Cocobod is relying on a significant rebound in production, although traders express concerns that this may not occur.
"The financial risks in Ghana are substantial at this time," stated another official from a trading company.
'A SIGNIFICANT SHORTFALL TO ADDRESS'
Prior to this season, Cocobod's primary responsibility was to purchase and market Ghana's cocoa output. It would secure a syndicated loan to finance the licensed buying companies (LBCs) that acquire beans from farmers and transport them to Cocobod's warehouses.
Initially, Cocobod intended to borrow up to $1.5 billion again, but in August, just before the new season commenced, it announced that it would refrain from seeking bank loans. This decision is expected to save $150 million in interest expenses.
Instead of bank financing, Cocobod is now requiring companies to pay at least 60% of their contract values upfront and to pre-finance the LBCs.
Several traders informed Reuters that Cocobod is providing one ton of cocoa to fulfill last season's unexecuted contracts for every ton that companies purchase at this season's spot prices.
By blending the old and new contracts, the average price per ton is estimated to be around $5,000. By the second week of November, with season-to-date arrivals reaching 183,000 tons, the advance payments would total approximately $550 million, although much of that cocoa has yet to be shipped.
Cocobod asserts that the system is functioning effectively, and farmers report receiving payments. However, opinions within the industry are varied.
Smaller traders express concerns that the new model increases their exposure to risk, compelling them to provide cash to unfamiliar upcountry buyers while benefiting larger players with established supply chains.
Crucially, this system is only sustainable as long as supplies are available.
Analysts, including Africa-focused commodities expert Tedd George, suggest that balancing prices to accommodate all roll-overs may necessitate a harvest of approximately 900,000 tons.
This figure exceeds Cocobod's own production forecast by 250,000 tons, a projection that some industry insiders already view as overly optimistic. "There is a significant gap to bridge, which could result in certain traders and local processors missing out on beans this season," George noted.
The potential consequences of a bean shortage remain uncertain, with speculation that Ghana may once again extend contracts into the next season.
Confronted with the possibility of incurring losses or incurring additional costs to adjust their hedges, some traders are beginning to lose interest in Ghana's cocoa.
"Trade houses are involved because they suffered losses and are looking to recover," remarked a small trader. "However, in the long run, chocolate manufacturers are developing strategies to lessen their reliance on Ghana." - Reuters