* Ghana facing serious currency, inflation problems
* Ivory Coast rejuvenating sector after years of war,
* Resulting price gap has seen smuggling of Ghana's cocoa
* Troubles threaten Ghana's long-term production targets
By Joe Bavier
ENCHI, Ghana, July 28 Three years ago, when
James joined Ghana's anti-smuggling task force, his job was to
intercept illicit cocoa shipments from neighbouring Ivory Coast
to preserve the superior quality of his country's beans. Now he
has to stop it flowing the other way.
"We used to burn their cocoa because it was not good," said
the wiry 60-year-old, one of the leaders of a network of growers
and informants that monitors Ghana's porous border with its
"Now the Ivorians are buying our cocoa. They are sucking our
blood," he said, as he set out to patrol muddy tracks that run
from Enchi-Aowin district and cross the border.
Ivory Coast has partially closed the quality gap in the past
two years, but it is a collapse in the Ghanaian currency, the
cedi, that has driven the reversal of fortunes between Ivory
Coast, the world's largest cocoa grower, and Ghana,
second-largest. Between them, the two produce 60 percent of the
global supply of the principal ingredient in chocolate.
Ghana's big budget and current account deficits have
stripped the cedi of 45 percent of its value against the
dollar since January.
That means farmers in Ghana, who get a fixed price for the
season from the country's cocoa marketing board, Cocobod, can
get much more for their crop by smuggling it into Ivory Coast,
where the sector is recovering strongly after a decade of civil
conflict and political turmoil.
At a time when chocolate consumption is booming in new
markets, particularly in Asia, Ghana's problems may jeopardise
its ambitious plans to nearly double production to mitigate the
resulting global supply shortfall.
"Every time the cedi devalues against the dollar, it reduces
the capacity to buy fertilisers and inputs to help the farmers,"
said a European analyst. "If you consider Ghana is going to
produce 900,000 tonnes, about 21 or 22 percent of world demand,
it's of enormous importance."
Ghana emerged as a success story during the 2000s, when war,
political instability and a disastrous liberalisation brought
Ivory Coast's cocoa sector to its knees.
Ghana's output more than tripled from 340,000 tonnes in the
2001/02 season to a record 1,025,000 tonnes a decade later.
Strict controls cemented its reputation as a producer of top
quality beans, establishing a brand that fetches a premium.
A combination of better management of forward sales,
increasing world prices and improvements in quality allowed
Cocobod to increase the amount it paid farmers from 900 cedis
per tonne in 2005 to 3,392 cedis ($989) per tonne for the
IVORY COAST REVIVAL
Then the twin deficits mounted and the government finally
abandoned its struggle to prop up the currency.
That also caused a spike in inflation, which was 15 percent
year on year in June, hitting farmers' purchasing power.
At the market in Karlo, a border town not far from Andrews
Assum's cocoa plantation, a bag of rice that cost 75 cedis a
year ago now sells for 120 cedis.
"The market is very high, and the cedi is very low. You
can't buy anything," said the 35-year-old farmer. "We don't have
enough money to continue our children's schooling."
Little wonder, then, that in May, industry sources estimated
that since the start of the season in October, up
to 100,000 tonnes of beans had been trafficked across the border
into Ivory Coast, where they can now sell for much more.
"It's the situation that is compelling them to do so," said
Alfred Allotey, who manages a purchasing depot in Karlo for PBC
Limited, Ghana's largest licensed buyer.
"No-one outside Ghana has realised how bad it's got," said
Edward George, head of soft commodities research at Ecobank.
In Ivory Coast, meanwhile, the sector is on the up.
Last season, after a brief 2011 civil conflict ended years
of political turmoil, its new President Alassane Ouattara
ushered in reforms that established a single marketing board,
the Coffee and Cocoa Council (CCC), to manage the sector.
It abandoned a system of spot sales and auctioned off the
bulk of its crop in advance in order to set a guaranteed minimum
price for farmers. In a single season it succeeded in stamping
out a decade-long trafficking epidemic that saw a peak of around
200,000 tonnes of cocoa lost to smugglers in the 2010/11 season.
At the October start of the 2013/14 season - the second
under the new reform regime - the CCC raised its farmgate price
so it was roughly equal to Cocobod's. Not for long.
As the Ghanaian cedi plunged, Ivory Coast's CFA franc, a
regional currency pegged to the euro, held stable. Today, in
dollar terms, the Ivorian price is more than 55 percent higher.
"You hear people talk about (getting) 300 Ghana cedis, 350
Ghana cedis (per 62.5 kg bag) against our 212 Ghana cedis," said
David Akuetteh, the regional manager for PBC responsible for 11
border districts in western Ghana.
While other parts of Ghana have had a bumper crop this year,
in the west - traditionally home to some of the most productive
areas - his buyers are missing their targets.
"You can see from the figures ... that much more cocoa has
been lost by way of smuggling this year," he said.
NEED HIGHER PRICE
Standing beside a footpath cutting between a cornfield and a
banana patch within a few kilometres of the Ivorian border,
James, whose name has been changed to protect his identity,
pointed out the footprints in the mud left by smugglers.
While his team has had some success in stopping trucks,
several of which are now impounded at the district police
station, much of the cocoa smuggled out of Ghana is leaving the
country on the heads of porters.
"The government must try as much as possible to boost the
price. That will be the only solution," James said. "Other than
that, we are only 15 here. We cannot cover all of the routes."
Cocobod hopes to overtake Ivory Coast as the world's top
producer, an ambitious target that requires it to double
production from the sector, Ghana's third-largest export earner.
"We know that's not going to happen soon. It's a long-term
goal and not a race," a senior Cocobod official told Reuters,
asking not to be named. "We're confident of significantly
raising output from the current levels."
The agency has pledged to close the price gap with Ivory
Coast in order to curb smuggling when it begins marketing the
2014/15 crop in October.
"We take a lot of things into consideration when fixing the
price. But for the coming season, we will have to use Ivory
Coast prices as the key benchmark," the Cocobod source said.
That could prove a tall order.
"They need to increase the farmgate price next year, but
that's very difficult. Given current international prices, they
may actually need to double it," Ecobank's George said.
Although the currency crash means Cocobod will have received
a windfall this year - selling in dollars, but buying in cedis -
its resources have fallen prey to weak government finances.
With the finance ministry forecasting a year-end budget
deficit of 8.8 percent of gross domestic product, there will be
a lot of budget gaps to close.
Johannes Jansen, the World Bank's senior agricultural
economist in Ghana, puts the windfall at hundreds of millions of
dollars, helped by current high market prices, but he says
little of that will find its way into the pockets of farmers.
"They are thinking of giving the farmers a bonus at the end
of the season, but it is likely to be relatively small," Jansen
said. "This is not a sustainable way of managing a value chain,
since farmers seem to be receiving the short end of the stick."
Ghana's flagship subsidised fertiliser and pesticide
spraying programmes, slashed in half as a cost-cutting measure
this season, were an early casualty of Cocobod's financial woes.
And though the marketing board now says it wants to breathe
new life into the programmes - credited by many as the principal
driver of the meteoric rise in output since 2000 - how it will
sustainably finance them remains unclear.
Ghana's processing sector, far from adding value, has
created another major headache. As grinders have struggled to
turn a profit, they have run up huge debts to Cocobod for beans.
"Cocobod may have to write off some or all of the $250
million debt owed by the grinders," according to an Ecobank
research note, estimating that Ghana is using just 60 percent of
its 430,000-tonne installed processing capacity.
Cocobod is consulting with sector actors, donors and
analysts with a view to correcting deficiencies in the current
system and mapping out a future. Jansen, while an enthusiastic
supporter of the process, said implementing meaningful change
would be a long and difficult process.
"In whose interest is it to reform the sector? Well, perhaps
not Cocobod's, at least not in the short run, because they are
doing well (from the currency windfall). And perhaps not the
government's either, because they can use cocoa money to plug
fiscal holes," he said.
"In the longer term reform is actually in everybody's
interest, since the status quo is just not sustainable."
Across the border in the Ivorian town of Niable, where
workers emerge from storehouses hauling burlap sacks marked
"Produce of Ghana" to sun-dry the beans on giant tarpaulins,
there is scant sympathy for Ghana's plight.
"If they send it over here, I'm going to buy it. That's how
it is," says Adoni Nkanza, a 51-year-old who farms five hectares
outside of town. "They're angry now, but before, our cocoa went
over there and they were happy ... That's fair."
($1 = 3.4300 Ghana cedis)
(Additional reporting by Loucoumane Coulibaly in Abidjan, Kwasi
Kpodo in Accra and Sarah McFarlane in London; Editing by Daniel
Flynn and Will Waterman)