Now it's chocolate: Ghana, Ivory Coast, and China move across supply chains, cut out Western firms
Cocoa prices hit records as massive volumes move out of Western markets, sell directly in China
Bullets:
Cocoa prices are hitting historic highs, as Western commodities markets are registering deficits of 478,000 tons of cocoa beans.
This is the result of a strategy by West African countries Ghana and Ivory Coast, the two biggest suppliers of cocoa to global markets.
Beginning in 2019, they partnered with Chinese firms to process their cocoa in-country, and to sell their product directly to Chinese companies.
By cutting out speculators and traders in Western brokerages, and going around marketing and branding companies in the US and Switzerland, producers in Africa and their buyers in China keep far larger profits for themselves.
West African suppliers more than double their exports by grinding their cocoa beans in-country, and Chinese firms realize far higher margins and a guaranteed supply of the world's high-quality processed cocoas.
Report:
Good morning.
Cocoa prices are hitting record highs. These lines are going straight up, for the cost of cocoa, which is used to make chocolate. And the reason is that China is buying it directly from cocoa producers in West Africa, and going around the commodities exchanges and traders that previously handled all these trades. In other words, African cocoa producers are selling directly to buyers in China, and that supply is being taken off of our markets, and our cocoa prices are going up.
We’ll go back to a report from 2021, because that’s when this started. This is a Swiss publication, and was written with Swiss chocolate companies in mind. The Ivory Coast and Ghana were meeting with Chinese investors, to build new plants in Africa, and set up direct sales channels in China. The Ivory Coast wanted to build plants so they could process all its raw beans domestically, in country, by this year, 2025. At the time, it was only about a third.
The Chinese loaned $388 million dollars for the project, and it included a processing plant, and two large storage warehouses with a capacity of 300,000 tons. Ghana is next door, and China began investing there in 2019, building a $100 million dollar factory what will increase Ghana’s share of processed cocoa to 25%, from 15.
The strategy for Africa is to pivot, away from Western companies, and toward Chinese ones. Africa wants to do more of the value-added work themselves, and to cut out middlemen. Cocoa production in West Africa was forecast to hit record volumes, and both the Ivory Coast and Ghana wanted to move down the supply chain, and capture the profits that they were exporting to foreign companies who were just buying raw beans and processing them in Europe or in the US. Doing this, they could double their export revenues. That’s what they wanted the Chinese investments for.
Here's what China wants: China will obtain preferential access to the cocoa coming out of the Ivory Coast, and it’s likely the same situation in Ghana. 40% of the output is reserved for Chinese companies.
China is where the chocolate market is growing the fastest, for Swiss companies. Asia Pacific grew by 7.4% in 2020 for Barry Callebaut, but globally their sales were down 2%. For Lindt, China grew 10% in 2020, but overall sales were down over 6.
Here are some charts that explain pretty well the problems facing African cocoa bean farmers, and facing Chinese companies. This is where the money goes, in the cocoa supply chain. Retailers and taxes are 44%. Chocolate manufacturers take another 35%. Processors are in for 7.6%. That adds up to 87% or so. Farmers get only 6.6%. If Ghana and the Ivory Coast can just move over, to the left, and take that piece of the pie, they can more than double their revenues from cocoa bean production in-country.
This chart shows the problem from China’s point of view. Chinese still eat much less chocolate than Americans and Europeans, but Asia Pacific is where the sales growth is, and this is where foreign brands are taking large profits. Foreign chocolate brands have 70% of the Chinese chocolate market. Chinese domestic brands get 30% of the market share, here.
China is looking at the supply chain chart, then from the other direction. They see that those foreign brands that are 70% of Chinese sales are collecting 44% of retailer sales, and 35% of manufacturing value-added.
China goes to Africa, meets with the supplies, and helped them build the processing plants and warehouses so Ivory Coast and Ghana could process their own cocoa supplies. In exchange, 40% or more of the processed cocoa is sold directly to Chinese companies, and come out of the Western supply chains.
That was Swiss info’s conclusion in 2021—this strategy is a threat to the Swiss chocolate industry’s profit margins and its raw materials supply. This is the report from 2021: If the strategy of Ghana and Ivory Coast is successful, they will be competing directly with Swiss commodity firms and producers, especially in China.
We’re now through 2024, and this is causing prices in our own markets to go parabolic, as giant volumes of cocoa supply are coming off of our exchanges. Analysts warn here at CNBC that cocoa and coffee are big markets for professional traders and speculators, but these markets are very dangerous now. ING says that the world market for cocoa is at deficit of almost 500 thousand tons. The stocks-to-grinding ratio is falling, from 35 to 27%--remember—that was the point of the direct investments by China: Africa wanted their cocoa stocks to be processed in-country; and both China and Africa wanted those processed cocoas sold in the Chinese market, going around everyone else.
This is similar to the coffee market. We shared a report recently about how Chinese companies were using the same playbook in coffee markets, building up supply chains here in China by buying directly from coffee plantations in South America. That reduces the volume of coffee hitting our own markets, and prices go crazy. Speculators in the coffee markets are getting killed, and many traders were selling short, anticipating a fall in price, but the supply never came in, so they had to cover their short sales and that drove the prices even higher.
Cocoa is going the same way. Here’s a Bloomberg chart for the cocoa market, which will register the third consecutive year of deficits. 2022, 2023, 2024. In 2021, the global cocoa market was in surplus by over 200,000 tons. 2021 was when China went in and built out the new processing plants in Africa. The next year, 2022, the global deficit was 200,000 tons. China lends the money and builds the cocoa processors and warehouses, and flips the global cocoa market from a surplus of over 200,000 tons, to a deficit of over 200,000 tons. In 2024 the deficit in our markets is 478,000 tons, because the suppliers in Africa are selling directly to buyers in China.
This is a feature of 21st century markets that we should be used to by now. This is the reality. Natural resources economies in South America, Asia, and now Africa want to move down the supply chains, and capture more of these revenues and profits for themselves. China, who is the biggest consumer of those natural resources, want to move UP those same supply chains, and deal directly with suppliers in those countries. Both China and West Africa, in this case of chocolate, look at the profits being earned by speculators on Wall Street, and by the branding companies who just take processed cocoa beans and put them in a nice package, and take over three fourths of all the revenues worldwide. That was a system that our brokerages and companies built, and benefited from, for many decades. And it’s all going away.
Be good.
Resources and links:
The chocolate price spike: what’s happening to global cocoa production?
Can China help African cocoa producers outmanoeuvre Big Chocolate?
China’s Chocolate Market – Trends and Industry Overview
https://www.china-briefing.com/news/chinas-chocolate-market-trends-and-industry-overview/
Cocoa prices climb to new record high, prompting fresh warnings about extreme volatility
Chart, 2024 coco prices
https://www.instagram.com/naviamarkets/p/DECxW-OhJK1/
The chocolate price spike: what’s happening to global cocoa production?
I'm new to your work Kevin and must say it is soo refreshing to see hear and read a different perspective on China. You provide perspectives the MSM will not touch, if they even know about these events unfolding. The old ways of doing 'colonial capitalism' may be coming to an end for the developing worlds. Many many thanks for your work.
Excellent insight.