Although down from the record high of April, cocoa prices remain strong, with a remarkable 124% rise in 2024 so far [1]. And as shown below, this is on top of the nearly 61% price rise in 2023.

So, what lies behind this huge upturn? What could it mean for the external accounts of the world’s two leading cocoa-producing countries, Ghana and Cote D’Ivoire? And what could be the impact on the sovereign debt?

What’s driving the cocoa price surge?

Cocoa is a naturally cultivated commodity, so its production is heavily impacted by climatic conditions. In recent years, major producing countries, including Cote D’Ivoire and Ghana, have seen more irregular rainfall patterns that have reduced output. With supply down, cocoa prices have inevitably gone up.

While adverse weather is certainly the main driver, other supply-side factors have also been in play. The various costs of farming have been rising, owing to factors such as structurally higher prices for key inputs like fertilisers and pesticides. At the same time, costs have risen as producing countries seek to tackle issues like child labour and unfair farmer wages.

Economic significance for Cote D’Ivoire and Ghana

The neighbouring west African nations of Cote D’Ivoire and Ghana are the two leading global producers of cocoa beans, accounting for 39% and 11% of global output respectively. With cocoa beans (and related products) also accounting for 18% and 11% respectively of Cote D’Ivoire and Ghana’s exports, high cocoa prices have the potential to benefit these economies more than any other.

Potential impact on sovereign bonds

There are two main channels through which high cocoa prices can benefit the sovereign bonds of Cote D’Ivoire and Ghana. Firstly, most of the cocoa is exported and paid for in US dollars. As a result, higher prices tend to mean reduced current account deficits and more liquidity to make the dollar interest payments.

Secondly, higher cocoa prices should entail higher tax revenues from the cocoa industry. This should improve the ability of the governments to pay the interest on their bonds. All else equal, higher cocoa prices improve the credit standing and debt servicing capability of Cote D’Ivoire and Ghana, resulting in downward pressure on their bond yields and upward pressure on bond prices.

Industry factors limiting the cocoa boost

The earlier ‘all else equal’ caveat is critical as this is rarely the case at the country level. For a start, the main reason for higher cocoa prices is reduced output – so when assessing the boost from higher prices, we also need to account for the impact of reduced sales volumes.

On top of this, farmgate prices paid to cocoa farmers are fixed periodically and usually far below market prices. For example, despite the recent 45% hike [2], Ghana’s current farmgate price of $3,062 per ton, which is only about a third of the global market price [3].  This disconnect tends to encourage smuggling, and is a well-known problem in both Cote D’Ivoire and Ghana, limiting the industry’s tax revenue potential.

Cote D’Ivoire also engages in forward sales, contracting its cocoa sales up to six months in advance. Consequently, the economic and fiscal benefits of earlier periods of market price strength will be delayed, and vice versa.

Putting everything together 

It’s clear the recent huge upsurge in cocoa prices has the potential to be a significant positive for the economies and sovereign bonds of Cote D’Ivoire and Ghana. However,  there are also important local structural factors that often limit the passthrough of higher global market prices. Furthermore, in the bigger picture, there’s always a myriad of other domestic and external factors that investors must consider when assessing the outlook for sovereign bonds.

 

Our Emerging Markets Monthly Insights are brought to you by our Equities and Fixed Income investment teams and their emerging markets experts. This is a core strategy within our public-markets offerings.