Ghana Faces Huge Shortfall in Cocoa Crop

(Wall Street Journal) – Dry weather and the late application of pesticides and fungicides to protect cocoa trees have caused Ghana’s crop to shrink significantly, raising the possibility that growers won’t be able to deliver enough cocoa to fulfill their contracts.

But Ghana’s cocoa farms are poised to bounce back in the next season, some analysts say, now that the national government has agreed to provide seedlings and pesticides directly to farmers, backtracking on some of the changes it had made to reduce its $400 million cocoa-subsidy program.

The erratic output spotlights a major vulnerability in the $7 billion cocoa-futures markets: an overreliance on Ivory Coast and Ghana, which together account for more than half of the world’s cocoa supplies. Last year, prices surged to a 3½-year high when the world’s worst Ebola outbreak hit West Africa, fanning fears of a disruption in cocoa production. The disease never spread to either Ivory Coast or Ghana, and prices retreated nearly 21% over a four-month period.

Ghana’s current woes have pushed cocoa prices toward the highs reached during the Ebola scare, likely leading to more expensive chocolate for consumers world-wide.

Last year’s cocoa surge prompted major chocolate makers, including Hershey Co. Nestlé SA and Lindt & Sprüngli AG, to raise their retail prices as much as 8% this year. Analysts say once price increases appear on retail shelves, they remain even if cocoa costs decline.

Ghana is expected to produce 696,000 metric tons of cocoa beans this year, according to the International Cocoa Organization, or ICCO. Initial forecasts had pointed to an increase in output to around one million tons, from 900,000 tons last year, according to Cocobod, the government’s cocoa-purchasing body.

The smaller harvest raises questions about whether Ghana can fulfill its sales contracts, which Cocobod made early in the season based on the initial forecasts. In March, Cocobod had offered to sell 850,000 tons of cocoa.

Cocobod declined to comment.

“There are people somewhere in the world expecting 200,000 tons of cocoa, some of them insisting it be from Ghana,” said Damien Thouvenel, a cocoa trader at Sucden in Paris. “They have a product line that says ‘Ghana’ on the pack of chocolate, and they can’t put ‘Ivory Coast’ on there.”

Cocoa prices are rising as processors chase the limited Ghanaian beans on the market. Cocoa for September delivery on the ICE Futures U.S. exchange settled at $3,260 a metric ton on Friday, up 12% in 2015. During the Ebola scare, cocoa futures hit $3,371 a ton on Sept. 24, 2014, which was the highest since March 2011.

“The production shortfall is squeezing everyone in the industry,” said a trade official with Ghana-based cocoa processor West African Mills Co. “We aren’t operating at our optimum capacity because there are no cocoa supplies; even inferior beans aren’t there.”

The executive said some processors and exporters may not easily recover from the losses because few anticipated the drop, after years of steady growth in production. West African Mills is a joint venture between Cocobod and Germany’s Hosta Group.

Changes in the subsidy program were partly responsible for the smaller cocoa crop in Ghana this year.

In an effort to reduce its costs, Ghana’s government began a phased reduction in the distribution of cocoa-tree seedlings and pesticides directly to the nearly one million cocoa farmers. Instead, it agreed to pay farmers a higher price for the cocoa and let the farmers buy the equipment and services they need.

But two years of low cocoa prices led farmers to pocket the extra cash from the government instead of investing it in their farms.

When the government discovered this was happening, it resumed delivery of the chemicals to kill pests and fungus.

However, the pesticide delivery came late in the crop’s development, leaving the cocoa vulnerable, according to a spokesman for the Ghana Cocoa, Coffee and Shea-Nut Farmers Association.

While Ghana’s output is shrinking, demand remains high. The ICCO recently revised its forecast for consumption to exceed production by 38,000 tons of cocoa beans this year, from a 17,000-ton shortfall previously.

“We believe that [more] price increases are coming, mostly from supply disruption or expected supply disruption, against a backdrop of increasing global demand, especially from emerging Asian markets,” said Matt Forester, chief investment officer at New Square Capital, an investment adviser in Newtown Square, Pa., with $380 million under management. The firm is overweight in cocoa, meaning it owns more positions in that market than its benchmarks recommend.

Mr. Forester said his firm is predicting that cocoa will be one of the strongest-performing commodities this year and will continue to trend higher from current levels.

Ghana finance minister Seth Terkper told a cocoa conference in Accra last week that the government had learned “valuable” lessons from this season’s setback. Cocobod’s initiatives would help revive production next season, the minister said.

While many traders agree Ghana is likely to see a rebound in its cocoa production next season, some are worried that Cocobod will oversell the crop again, causing shortages then, too.

“There is an overall fear now across the market that the same problem could happen next season,” said Sucden’s Mr. Thouvenal.