Accra/Pennsylvania: In the sweet world of chocolate, it’s seen as a club wielded by the OPEC of confections — a tool of a faraway cartel that artificially inflates the price of precious cocoa.
In Ivory Coast and Ghana, where most of the world’s cocoa is actually grown, it is viewed as something else entirely: a lifeline for farmers and entire economies held hostage to the vagaries of world commodities markets.
Now those competing viewpoints — globalization reduced to a chocolate bar — have collided in spectacular fashion and thrust the normally secretive machinations of some of the world’s biggest chocolate companies, cocoa traders and processors into rare public view.
The governments of Ivory Coast and Ghana have accused Hershey Co., maker of Kisses, Reese’s Pieces and other chocolate treats, of maneuvering to circumvent premiums tacked on to the price of cocoa futures in order to raise incomes for hard-pressed cocoa farmers. Hershey upended markets in November when it unexpectedly bought huge amounts of cocoa through the futures market, squeezing the New York contract.
“Some chocolatiers and trade houses have adopted covert strategies to circumvent the farmer income improvement mechanism with the aim of collapsing it,” Yves Kone, managing director of Le Conseil du Cafe-Cacao, and Joseph Boahen Aidoo, chief executive of the Ghana Cocoa Board, said in a Nov. 30 statement seen by Bloomberg, adding they will do “whatever is within our power to protect the over three million farmers from impoverishment.”
Hershey reiterated it’s fully paying the so-called Living Income Differential for its cocoa purchases from the season that started in October. Earlier it highlighted there was still cocoa in the market that was sold prior to the implementation of LID.
“We will continue to participate in the LID to support cocoa farmer livelihoods going forward,” the company said. “We look forward to further discussing this with Cote d’Ivoire and Ghana and to hopefully continue the sustainability programs that are benefiting cocoa farmers today.”
Many cocoa growers in West Africa live below the poverty line, growing beans in only one or two hectares. Chocolate makers and cocoa processors had agreed to pay the West African nations the LID of $400 a ton on top of the futures market, but after the pandemic slashed demand, companies needed to cut costs to weather a second wave of lockdowns from Paris to Los Angeles.
Hershey in November took the unusual step of directly sourcing its cocoa via the exchange, as the premium charged by Ghana and Ivory Coast made cocoa inventories that back futures contracts in New York more attractive. The move sent December contracts on ICE Futures U.S. to a record over March.
The countries retaliated by canceling all of the sustainability programs Hershey is involved in directly or indirectly, and said firms running programs on behalf of the Pennsylvania-based chocolate maker will also be barred from operating them.
The regulators also took aim at Mars Inc., saying the maker of Twix had migrated the bulk of its cocoa butter purchases from its traditional processors, buying from JB Cocoa and Guan Chong Berhad instead just to avoid paying the premium. Mars said it “categorically disagrees” with the allegations and highlighted that it was the first major manufacturer to support the LID.
The accusations are a further hit to the reputations of chocolate makers, which have come increasingly under pressure for their role in deforestation, child labor and poverty. Earlier this year, a report sponsored by the U.S. government showed that child labor had worsened a decade after the $100-billion chocolate industry pledged to reduce it. Hershey is an especially big name, as an American icon whose bars helped power U.S. soldiers across Europe during World War II.
In a Nov. 30 letter to Hershey, Ivory Coast and Ghana said the use of the exchange was a clear indication of the company’s intention to avoid paying the LID.
“The conspiracy and machinations by your company to evade the payment of the LID demonstrates your passive commitment to improve the incomes of three million West African cocoa farmers,” Kone and Aidoo said, adding that failure to comply with the orders would mean companies could lose their licenses to operate in the countries.
Ivory Coast’s regulator confirmed the letters and the statement. Fiifi Boafo, a spokesman for the Ghana Cocoa Board, could not immediately comment when reached by phone.
The cocoa squeeze in New York may not be as bad for Ghana and Ivory Coast as the countries have argued so far. That’s because Hershey’s purchase, while big for an exchange delivery, is only a fraction of the countries’ total production. With New York prices much higher than London futures, which form the basis to which the LID premium is added, there’s now a bigger incentive for other chocolate makers to buy again in the physical market, brokers and traders argue.
The spat is also a risk for Ivory Coast and Ghana, which still have a lot of their crops to sell, said Judy Ganes, president of J. Ganes Consulting who has followed markets for more than 30 years.
Ivory Coast and Ghana have in the past threatened to suspend chocolate makers’ sustainability programs, a tactic that in the past has worked. Still, market conditions are “vastly different” now, Ganes said.
“Our concern is that by cutting off industry sustainability programs, cocoa farmers will be negatively impacted as they will no longer receive the benefits provided by our on-the-ground programs as well as the price premium for certified cocoa,” Hershey said in its statement.
Shutting down the sustainability programs has “significant implications for cocoa farmers and local communities,” said Antonie Fountain, managing director at the Voice Network, which has called for more industry regulation. The group argues farmers need to receive about $3,100 a ton, up from $1,800 a ton now, according to the 2020 Cocoa Barometer.
“Whatever happened in the futures market in the past two weeks has been entirely legal, the question is whether these things should be legal or whether you should be able to force all companies to pay a fair price to farmers,” he said. “Shutting down the sustainability programs is exactly the wrong thing to do because it hurts the farmer.”
The countries also accused Chicago-based cocoa processor Blommer Chocolate Co., which usually processes large amounts of beans for Hershey, of collaborating, according to a separate Nov. 30 letter sent to the Cocoa Merchants’ Association of America in which the countries withdrew their membership from the group.
Blommer didn’t return a request for comment.
The nations also said Olam International Inc., the third-largest cocoa processor, had pursued a strategy of reducing the amount of Ghana and Ivory Coast beans from its recipes. The Singapore-based trader reiterated its “strong support” for farmers and boosting their incomes, in line with the objectives of the LID. “As one of the largest buyers of cocoa from Côte d’Ivoire and Ghana, our commitment is unwavering and we continue to support and purchase cocoa from both countries,’ said Gerry Manley, head of cocoa at Olam.
The cocoa regulators also said they were reviewing their membership to the Federation of Cocoa Commerce in London and that they are “reconsidering the incentives and the licenses granted to members of the FCC which are directly or subtly rejecting LID.”
“Ivory Coast and Ghana might be sending a stern warning to the trade but they also need to be able to sell their cocoa of which they have plenty of,” said Ganes, who previously worked for Merrill Lynch. “This is a stare down for sure with gloves off and will be interesting to see who blinks first.” – Bloomberg