Commentary: Ghana fixes new cocoa price to control smuggling

Date the commentary was written: 06/ 12 /2015

Read the original article on Theafricareport.com : Ghana fixes new cocoa price to control smuggling | West Africa by Dasmani Laary - 05.10.2015

The article under consideration is about an increase in the fixed price of cocoa in Ghana in order to curb the smuggling of cocoa into Ivory Coast. Ivory Coast and Ghana share a boarder cutting through their respective cocoa plantations hence, smuggling easily occurs. The article is also about a subsidy granted to the cocoa farmers to raise their output.

The Ghanaian government imposed a higher fixed price of cocoa, this can viewed as the government imposing a higher minimum price on cocoa as the fixed price is above the equilibrium price. A fixed price is a market price imposed by the government and producers are only allowed to sell at exactly that price.

Cocoa Board is a government-controlled institution, fixes the buying price for cocoa in Ghana. Thus the cocoa market in Ghana is planned. The price-fixing is to protect cocoa farmers from volatile prices on the world market as the article says.  

From the article under consideration, the new fixed price of cocoa per ton is $1759 is an increase from the former $1444. This increase would prevent cocoa farmers from smuggling their cocoa to Ivory Coast to sell it at the once better price of $1718 per ton.

Price elasticity of demand or supply refers to the responsiveness of quantity demanded or quantity supplied due to a change in price.

The price elasticity of demand for cocoa is relatively elastic as Ivorian (and South American cocoa) are perfect substitutes.  The supply of Ghanaian cocoa is also elastic because of the smuggling of cocoa between Ghana and Ivory Coast which depends on price hence in effect affects the supply of Ghanaian cocoa positively or negatively. So if the price is high in Ghana (higher than Ivory Coast Cocoa) smuggling from Ghana to Ivory Coast would be curbed and rather cocoa grown in Ivory Coast would be smuggled into Ghana hence increasing the supplied quantity of Ghanaian Cocoa. The effect of increasing the fixed price is shown on this diagram:

Figure 1: Increasing the fixed price

As a result of this increase in quantity supplied there would be an excess supply (QS1 to QS2) of Ghanaian cocoa.

However cocoa can be stored for a long time without losing its quality, but the government would then need to spend more on storage facilities (as the article makes reference to warehouses being built). An increase in the fixed price would also make Ghanaian cocoa less competitive globally, as Ivorian cocoa (and South American cocoa) would be winning the price war. This may be prove costly and highly inefficient for the Ghanaian government as 15% of their GDP alone is from cocoa.

However the aim of increasing the fixed price was to curb the smuggling of cocoa to Ivory Coast from Ghana and this action would achieve this aim. But not only would the policy do so, but it would also stimulate the smuggling of cocoa from Ivory Coast to Ghana, reversing the tables.

Although I have discussed the decrease in international competitiveness of Ghanaian cocoa (as PED is relatively elastic) that does not necessarily mean there shall be a decrease in revenue. Firstly at the old and new fixed price are relatively higher than the equilibrium price, hence PED may be inelastic at those high prices. Also, due to multiple contracts and deals in place with cocoa processing firms, Ghanaian farmers would still be able to sell to their previous customers for example Nestle. Not only that, but as there would be a higher supply of cocoa from Ghana, Ghanaian farmers would be able to meet their contract obligations with those cocoa processing firms whereas due to the reduction in cocoa in Ivory Coast, Ivorian farmers may not meet their obligations hence their deals and contracts would be passed on to Ghanaian firms

In a bid to further increase the supply of cocoa in Ghana (as the article refers to the targeted 900,000 tones output for the 2015/2016 which is an increase from the actual 700,000 output of the previous year) the government is giving cocoa farmers a subsidy. The bonus of 5 cedi per bag of 64 kilogrammes, is a subsidy per unit. A subsidy is financial aid given to producers by the government in order to decrease their cost of production and in effect increase their total output. The effect of a subsidy is shown in Figure 2;

Figure 2: Effect of subsidy in the Ghanaian Cocoa Market

As illustrated in Figure 2 producers (Ghanaian farmers) would have a higher revenue due the subsidy, however the Ghanaian government would have to pay a lot for this subsidy. Either way, this decreases the cost of production for farmers and in effect are able to produce more cocoa.

The combination of the two policies discussed in this paper is simply going to lead to a very large increase in supply of cocoa in Ghana. However this may not be so beneficial for all stakeholders. Initially farmers may enjoy larger incomes, but may have to eventually sell off the cocoa in excess supply at a lower price due to expensive storage. Government expenditure would increase due to the subsidy and the stabilization fund discussed in the article. However if the demand for cocoa continues to increase in the global market, Ghanaian government and farmers would benefit greatly.