Ghana's Competitive Advantage in the Cocoa Processing Industry

GHANA'S PREMIUM COCOA

The quality of the raw material is one of the major determinants of Ghana’s competitive advantage in cocoa. Ghana is renowned for producing the best quality cocoa in the world, and its entire marketing system, including stringent quality controls, is geared towards maintaining this quality.

Companies from the cocoa and chocolate sector usually accept the strong regulatory influence of the Ghanaian government on the market. This is partly due to the fact that Ghanaian cocoa is still known for its high quality for standard cocoa, while cocoa quality in neighboring Cote d’Ivoire decreased after liberalization since companies used to mix higher quality beans with lower qualities from other regions to achieve the flavour needed for standard chocolate.

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For a long time, Ghanaian cocoa was traded with a premium of 7 to 10 percent above the average world market price. Additionally, trading partners know that they can rely on delivery contracts with the COCOBOD.

The cocoa value chain has the best potential investment opportunity for the economic development of Ghana based on the facts that Ghana has a clear competitive advantage in cocoa production (second largest producer in the world), cocoa makes up a larger production supply than all other crops in the country while the sector also receives unflinching government support.

UNTAPPED COCOA CHOCOLATE AND BEVERAGE MARKET

Ghana is missing the key to establish a successful cocoa chocolate and beverage local market across sub-Saharan Africa. Cocoa products and chocolate are not part of the local diet in Ghana, currently Ghana’s per capita chocolate consumption is estimated at just over 0.5kg per annum; this therefore represents a huge untapped chocolate market in Ghana which processors could take advantage by expanding processing beyond intermediate products. Despite the limited consumption of chocolates and cocoa products in Africa, there is great potential for cocoa beverages and chocolate products looking at Africa’s increasing middle class.

20% DISCOUNT ON COCOA BEANS (LIGHT CROP) FOR PROCESSING

In its bid to attract investors into Ghana’s cocoa processing sector, the COCOBOD sells beans from the light crop with a 20% discount. Companies which therefore process cocoa in Ghana can buy cocoa beans from the light crop with a 20% discount, hence increasing their profit margins.

PLANS BY GOVERNMENT TO PROVIDE DISCOUNTS ON MAIN CROP BEANS

The Government of Ghana in a meeting with the top cocoa processors in Ghana on May 5 2017 announced its commitment to reducing prices for the cocoa beans it sells to local grinders in a bid to boost processing volumes and create more employment. According to the Chairman of COCOBOD, Ghana’s cocoa regulator was going to carry out a cost-benefit analysis and consider some discount so the processors can buy the main crop to ensure that they process at full capacity, which will help create more jobs for the youth.

TAX EXEMPTIONS FOR COCOA PROCESSORS

Many of the processing factories in Ghana operate in export free zones (EFZ) and enjoy massive tax exemptions or reductions. The low tax income from cocoa processing in Ghana is a huge incentive enjoyed by most cocoa processing companies active on the market in the export free zones enclaves.

Unlike Ivory Coast, major incentives for investors include:

· A 100% exemption from the payment of direct and indirect duties and levies on all imports for production and exports from free zones,

· A 100% exemption from the payment of income tax on profits for their first 10 years (after 10 years, these companies pay no more than 8% income tax, compared to 25% from non-EFZ companies),

· Exemption from value-added tax (VAT) on purchases, including utilities, total exemption from payment of withholding taxes from dividends arising out of free zone investment and

· Relief from double taxation for foreign investors and employees where Ghana has a double taxation agreement with the country of the investors or employees.

Non-monetary incentives includes:

· No import licensing requirements, minimal customs formalities,

· 100% ownership of shares by any investor; foreign or national in a free zone enterprise is allowed,

· No conditions or restrictions on repatriation of dividends or net profit, payments for foreign loan servicing, payments of fees and charges for technology transfer agreements and remittance of proceeds from sale of any interest in a free zone investment,

· Cocoa processors in the free zones are also permitted to operate foreign currency accounts with banks in Ghana,

· At least 70% of annual production of goods and services of Free Zone Enterprises must be exported, consequently up to 30% of annual production of goods and services of a free zone enterprise are authorized for sale in the local market,

· Cocoa processors in the free zones are also guaranteed against nationalization and expropriation.

In summary, local processing is encouraged by the Government of Ghana through incentives such as price discounts, extended credit for payment, permission to import essential machinery, conferment of Export Processing Zone status on companies operating in the zone, inter alia, for example, COCOBOD (the government’s cocoa regulating body) discounts beans from the minor light crop season, which runs from May to September, to local processors. The Government of Ghana’s vision is to enable private companies to position themselves profitably in adding value to raw cocoa beans before export against the fluctuating world market prices of cocoa, and more importantly to enhance the revenue generation potential of the cocoa sector in general.

Newcomers in Ghana’s cocoa processing industry like Niche Cocoa, which is a locally owned company started operations in May 2011 as a Small and Medium-scale Enterprise (SME) with 100 workers and an installed cocoa processing capacity of 30,000 metric tonnes per annum. Within a span of 6 years Niche Cocoa has managed to double its capacity to 60,000 metric tonnes per annum. It has also boosted its workforce to 250. Niche Cocoa which also operates in Ghana’s Free Zones enclaves enjoys all the allocated tax exemptions.

French multinational cocoa processing company, Touton Group in 2015 announced its acquisition of the 24,000 metric tonnes capacity Commodities Processing Industries (CPI) in Ghana’s Free Zones enclave for US$ 18 million. In 2016, a year after its acquisition, Touton Ghana increased production capacity by 25% to 30,000 tonnes and plans to increase production capacity by 125% to 60,000 tonnes within 5 years. Touton and other major cocoa processing companies were attracted to the Ghanaian market because of the benefits from Ghana’s export free zone (EFZ) advantages as well as the discount that COCOBOD gives on light crop beans.

In July 2016, the Cocoa Processing Company which is state owned also received a major boost following the successful signing of a new agreement with the French company, Touton Ghana. The agreement allows the state-owned company to process 25,000 tonnes of cocoa beans per annum for the latter in return for payment.

NEARNESS OF FACTORY TO RAW MATERIAL & THE TEMA HARBOUR

When setting up a cocoa processing factory, processors need to take into account the cost of transporting raw materials and components from suppliers as well as shipping or distributing cocoa products. Transport costs and time constraints make it logical to produce close to the source of raw material and also, after raw beans are processed, nearness to the Port of Tema helps to cut down transport and shipping cost.

Since the free zones enclave is located in Ghana’s port city of Tema, this therefore allows easy access for the purchasing of cocoa beans from COCOBOD’s warehouse in which is also located in Tema, hence cutting down transportation cost for processors when buying cocoa beans to be processed. The location of cocoa processing factories in the Tema free zones enclave also gives processors easy access to the port when cocoa products are to be shipped, this also reduces overall shipping cost with regards to transporting products from factory to the Tema Harbour.

GOVERNMENT’S UNFLINCHING SUPPORT FOR THE SECTOR

In order to assure cocoa processors of the government’s further commitment to the private sector with its policy to increase local processing, COCOBOD took positive steps to liberalize the cocoa processing agribusiness. The largest locally owned processing company in the country is the Cocoa Processing Company (which was state-owned). The Government of Ghana sold a 25% stake in the company via the stock exchange in Accra. The Government of Ghana then further reiterated after this sale that competition is important and especially the opportunity for Small and Medium-scale Enterprises to succeed and contribute to Ghana’s economic development.

The Ivory Coast Problem

HIGH TAX ON EXPORTS AND NO INCENTIVES FOR PROCESSORS

Before the 2012 cocoa reforms, cocoa processors in Ivory Coast under the Droit Unique de Sortie (DUS) system had to pay taxes on the weight of exported products rather than on the weight of raw beans utilized to create the products. This was a tax break incentive which allowed cocoa processors to pay less taxes on their products when exporting. However as part of reforms in 2012, Ivory Coast abolished this 20-year-old tax break for cocoa processors, allowing grinders to instead pay taxes on the weight of raw beans they used for processing, while giving them no added incentives on cocoa purchasing.

This put grinders at a disadvantage since they now had to pay the same taxes as exporters of raw beans. Unlike exporters of raw beans who are able to sell their cocoa with relatively low infrastructure costs, the Oxford Business Group notes that, grinders lose an estimated 23% of their beans during processing while having to pay for expensive machinery, hence putting grinders at a huge disadvantage than exporters of raw cocoa beans.

Cocoa processing companies in Ivory Coast are therefore not willing to expand their capacities since they believe it is not economically viable without the initial tax break incentives. Condicaf, which has an offtaker agreement with Transmar, was not grinding at full capacity due to high costs.

In 2015, amid complaints from local processors, the government of Ivory Coast then allocated cocoa processors half of 2015's April-to-September mid-crop and launched efforts to negotiate new tax breaks to take effect in the 2015/2016 season. In an attempt to appease grinders and reduce taxes, the government of Ivory Coast decided to levy a 14.6% tax on bean exports, 13.2% on cocoa liquor (cocoa mass), 11% on cocoa butter and cake, and 9.6% on powder.

These new government tax breaks does not in any way favour new companies who are about or planning to establish cocoa processing factories in Ivory Coast since the already existing processors who have operated before the 2012 cocoa reforms were implemented had enjoyed higher profits from massive tax cuts for their operations hence putting new processors and especially Small to Medium-scale processors at a disadvantage.

Also, new processors will also be at a huge disadvantage since the new tax breaks states that in order for one to benefit from it, you must already have a factory or plant and that if a processor’s capacity was less than 50,000 tonnes per year you must increase your capacity over 5 years by 15% per year. If it was above 50,000 tonnes, capacity must increase by 10%, and above 100,000 tonnes, capacity must be increased by 7.5%. While this benefits those who are already in the field and already processing cocoa in Ivory Coast; since it gives them an incentive to increase their capacity. For newcomers who are about to enter the cocoa processing sector in Ivory Coast, they would be at a disadvantage since these conditions would not allow their business to be viable.

Cocoa processing in Ivory Coast therefore does not favour new processors but tends to favour already existing processors who have very large processing capacities. Hence rendering the industry less attractive to new investors as well as small to medium scale cocoa processors.

IVORY COAST COCOA DEPENDENCE CAUSES ECONOMIC UNCERTAINTIES

Ratings agency, Moody’s enunciates that the impact of the 2017 cocoa price falls on Ivory Coast’s current account balance will be more significant for the country than Ghana since the economy of Ivory Coast is much dependent on cocoa as compared to Ghana. For instance, cocoa exports accounted for around 43% of Ivory Coast’s total merchandise exports in 2015, compared to just 24% in Ghana.

The impact of cocoa price declines on Ivory Coast’s economy has been much evident in recent times when the country was forced to cut planned spending for 2017 by 10% due to a sharp drop in world prices of cocoa, this shows how the economy of Ivory Coast is exposed to cocoa price vulnerabilities and shocks. Ivory Coast’s problem of cocoa price volatility places a lot of uncertainties on the county’s economy, since pricing hikes are influenced by international factors.

Ghana’s economy on the other hand is not induced with economic instability when cocoa prices decline on the international market since the country’s economy is much diversified and not solely dependent on cocoa revenues. Moody’s indicates that Ghana’s higher GDP growth supported by new oil and gas field developments is bound to cushion any impact from cocoa price decline (worldwide) on its credit profile, hence cocoa price cuts is likely to have a milder impact on Ghana’s economy as compared to Ivory Coast.

RECURRING UNREST THREATENS THE FUTURE OF POLITICAL & ECONOMIC STABILITY IN IVORY COAST

Ivory Coast has recently enjoyed relative stability and rapid economic growth, but the scars left by a decade of intermittent civil war, which ended in 2011, are still evident.

In the most recent unrest, 3,000 people died in violence after longtime president Laurent Gbagbo lost the 2010 presidential election and then refused to cede power to victor Alassane Ouattara. After a military intervention, Ouattara became president and Gbagbo now faces charges at the international criminal court.

Ouattara has received credit for overseeing Ivory Coast’s resurgence, but has struggled to reform an army long riddled with ethnic and political divisions.

Though Ivory Coast has emerged from a 2002-2011 political crisis, most soldiers, mostly former rebels, seized control of the country's second biggest city, Bouake in 2016, sparking a series of smaller mutinies across the country and exposing cracks in its post-war success story. The state agreed in January 2017 to pay almost US$ 20,000 each to some soldiers to quell a mutiny over unpaid bonuses and better living conditions.

Our analysis points to the fact that, for a group of rebels to be able to seize the second largest city in Ivory Coast shows that this unrest could be far from over since it has exposed some vulnerabilities in Ivory Coast’s military, intelligence and security systems. These vulnerabilities could be further exploited or be sparked again by other rebel groups or individuals who also feel sidelined for political or ethnic reasons.

The recent revolt by rebels in Ivory Coast has strongly impacted investor confidence and caused many investors to hold off on planned investments, according to Reuters, most cocoa investors are waiting after 2020 before they invest in their factories since they believe the crisis is not over. This could further undermine the economic recovery process of Ivory Coast.

Ghana on the other hand has enjoyed a stable and peaceful political regime. Since the restoration of civilian rule in 1992, Ghana has become a vibrant democracy, witnessing three changes of power between the two major political parties through elections in 2000, 2008 and 2016, both at parliamentary and presidential level.

The December 2016 general elections in Ghana were peaceful and free, with victory to the opposition for both the presidency and the parliament. This has further strengthened Ghana's reputation as Africa's most stable democracy. Aside economic success, the political stability in Ghana is seen as a major tool that has enabled majority of multinationals in Ghana to grow and expand their businesses from Ghana into other regions in Africa, being the fact that political maturity, good governance system and peaceful co-existence are elements that boost investor confidence in a country.

Image Credit: caribbeanfinecocoaforum.net