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Will sky-high cocoa prices lift West African farmers?

West African cocoa farmers and their families should be cheering that a 'market cartel' has emerged, pushing cocoa prices up. Capitalism, so often the instrument of their oppression, is now working dramatically in their favor.

By G. Pascal ZacharyGuest blogger / August 2, 2010

A producer spreads cacao seeds for drying in Yaokoka, Ivory Coast in this file photo. The seeds are turned into cocoa for making chocolate products. Ivory Coast is the world's top cocoa grower, but will the skyrocketing cocoa prices make life better for farmers there?

Thierry Gouegnon/Reuters

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Cocoa farmers in West Africa – growers of the main portion of world cocoa supply – are distant actors in a weird rumble over prices, which recently hit a 33-year peak, achieving the highest prices on record since 1977. The proximate cause of the record price is speculative activity by commodities traders, especially a particular hedge fund, Armajaro of London, which recently shocked financiers by actually taking deliver of physical cocoa.

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The financial drama has masked a fundamental shift in the pricing of one of Africa’s most prized outputs. Cocoa is essential in the manufacturer of chocolate and producers, who are largely clustered in the neighboring countries of Ghana and Ivory Coast, have long failed to form a cartel to drive up prices, much in the same oil producers (OPEC) do. In economic terms, cartels can make sense, rewarding owners of a relatively scarce commodity.

Common and concerted action is often required for a cartel to take hold. When governments try to form cartels – say, to fight back against traders in the world’s big cities – they must hew to the same script. In the case of Ghana and Ivory, such common action has never been possible. Since independence in 1957, Ghana’s government has closely controlled the sale of cocoa, essentially nationalizing the crop through a cocoa board that acts as a single selling agent on the international market and prices on farmers who by law must sell their crop to the government. Ivory Coast, by sharp contrast, has long permitted farmers to sell to anyone, on the open market, at any price they can fetch. The result is that farmers in Ivory Coast gain more money from their cocoa than farmers in Ghana; it also means that official production in Ivory Coast is boosted by smuggled cocoa from Ghana.

The cartel of international cocoa buyers – chiefly America’s ADM and Cargill and Zurich-based Barry Callebaut – all of three of whom exist in close cooperation with a small group of global end users, concentrated in Europe and the U.S. – benefited greatly from the schism between Ghana and Ivory Coast on cocoa policy. Lower prices were the result. For decades even, Western companies, and consumers, benefited from ultra-low prices of raw cocoa, which fueled the expansion of cheap chocolates in groceries and sweet shops.

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