Cocoa Buyers, Consider the Farmer
January 9, 2024
Direct delivery projects miss the mark for agricultural development in Liberia
January 9, 2024Kim Beevers, Mark Wallace
For the 2019-2020 cocoa trading season, Liberia Agriculture Commodity Regulatory Authority (LACRA) first announced Liberia’s farmgate cocoa reference for the September 2019 trading month. The price? US $1.30 per kg for Grade 1 cocoa and US $1.18 per kg for Grade 2.
Was this the best-fit reference price? Here’s why you should care.
What is the farm gate reference price?
The farm gate reference price is the daily reference price adjusted for market access and quality/quantity factors. Market access costs are all the costs associated with bringing cocoa from the farm gate to the border or port for export, such as storage, transport and margins applied by buying agents.
Farm gate refers to the price of product (cocoa) available at the farm via direct purchase from the producer.
Why does the farm gate reference price matter?
Farmers and traders alike utilize the reference price as a basis for decision-making and negotiation. It informs trade.
- Low reference prices hurt farmers. Traders, buyers, and farmers all utilize reference prices as the basis of negotiation. Low reference prices result in lower trade prices – which hurt smallholder farmers the most.
- Low reference prices encourage cross-border smuggling, hurting much-needed government revenue. The proximity of Liberia’s main cocoa trading county to neighboring Sierra Leone, the dilapidated intra-Liberian road network, and especially low reference prices conspire to encourage unregulated cross-border trade. In this scenario, it is legitimate government revenue that loses out.
- Low reference prices dissuade farmer investment in the quality of the cocoa produced. High reference prices also hurt farmers. Attracting investors and buyers into Liberia in part relies on the perception of value that can be received here. Offering unrealistically high reference prices dissuades market entry and engagement. Fewer buyers results in less competition for Liberian cocoa; concentrated purchasing power inhibits competitive pricing.
How is Liberia’s farm gate reference price calculated?
A number of factors were calculated into the farm gate reference price published in Liberia this year:
- According to LACRA’s public posting, the price was calculated: “Using the average International Cocoa Organization (ICCO) daily quotations on the London Financial Futures & Options Exchange (LIFFE).” In follow-up, we learned that this means the average of the final 7 days of the previous month’s London futures cocoa price.
- However, the price also factors in financing costs, administrative and operational costs for the buyer, shipment fumigation, drying costs, container weighing fees, government taxes, BIVAC inspection, and commission – among others.
- Further, the price assumes a discount of GBP £100 per metric ton applied to all Liberian cocoa.
- Finally, the template itself – the calculation – was put together by a project about a decade ago.
Where do we go from here?
Calculating the Liberian cocoa farm gate reference price is a complex, challenging task. It is made all the more difficult where ready industry and pricing data is hard to come by. But, it matters – a lot.
Now is the time to rework the reference price. On the heels of renewed attention and reform with respect to LACRA-established regulation, there’s an opportunity to extend the debate and reform process to include the farm gate reference price – and as part of wider efforts that need to take place in order to establish a vision and plan for the future of Liberia’s cocoa industry.
Consider the Living Income Reference Price
At GROW, we have advocated for Liberia to position more to attract niche and values-driven market players that are willing to pay premiums for guaranteed specialty cocoa. Certifications offer more than a price premium (Read More about the pathway to certification in Liberia).
Fairtrade certified cocoa is one specialty certification. When we think about farmgate reference prices, Fairtrade offers an important new consideration: Living Income Reference Price (LIRP). LIRP is built on a complicated set of calculations that includes productivity, country, family size, and diversification of income.
In October 2019, Fairtrade officially launched the LIRP for Ivory Coast and Ghana – the world’s two largest cocoa producing countries with 60% global market share. The Fairtrade Minimum Price for conventional cocoa was raised 20% from $2.00 to $2.40 per kg 20. For organically-farmed cocoa, the Fairtrade Minimum Price was set at $2.70 per kg.
Interested in the global daily market price?
The International Cocoa Organization (ICCO) offers daily market reference prices on their website.
The ICCO daily market price is not the same as the farm gate reference price. Rather, the ICCO daily price “is the average of the quotations of the nearest three active futures trading months on ICE Futures Europe (London) and ICE Futures US (New York) at the time of London close.”
It is used as a reference often when setting export contracts, for example. On October 1, 2019, the price was $2.39/kg.
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