1
CAMES 1995
1
I,if\\
J
CANDIDAT:
KAMA BERTE
I1
PAYS:
COTE D'IVOIRE
D'IYOIRE
ETABLISSEMENT:
ETABLlSSEMENT: ENSA YAMOUSSOUKRO
I1
CTS: SCIENCES ECONOMIQUES
1
I
LISTE
L1STE D'APTITUDE: MAITRE-ASSISTANT
\\
1
I
THESE: MASTER Of
OF SCIENCE
ANALYSE ECONOMIQUE DU MARCHE DU CACAO
1
I

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1
ECONOMIC ;UJ~~YSIS
OF THE WORLD COCOA ~~~KET
by
Xama Serte
3erte
DUES Sciences,
Cniversite d'Abidjan
d'
Abidjan
DAG Agriculture,
Ecole Nationale Superieure Agronomique d'
Abidjan
A Thesis Submitted in Partial Fulfillment
of the Requirements for the Master of Science Degree
Department of Agribusiness Economies
Economics
in the Graduate School
Southern Illinois Dniversity
July 1980

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ACKNO\\iLEDG~~~TS
The author is indebted to Dr. WaIter J. wills for his
counsel, patience and guidance during all stages in the
preparation of this study.
The author is indebted to Dr. Georges Schurnaker for
his critical comments on the thesis draft.
To Dr. Farrel Olsen of the Depar~~ent of Plant and
Soils Sciences,
the author would like to express his sincere
thanks.
The Author would also like to take this o~~ortunity
to express his appreciation to the ~any professors and fellow
graduate students for their help in ~aking the author's stay
at Southern Illinois University an educational and meaning-
ful experience.
Finally,
the author would like to express his apprecia-
tion to all the members of his family in the Ivory Coast for
their unfailing patience and support during even the most
trying periods of the author's sojourn in the United States.
i i

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TABLE OF CONTENTS
Page
ACK~m'lLEDGEME~TS
.
i i
LIST OF TABLES
.
.
iv
LIST OF FIGURES
. . . . . . . . . . . . . . .
v
Chapter
1.
I~TRODUCTION .
.
.
. .
. . . .
1
Importance of Cocoa
.
.
.
.
. , . . .
1
The Problem
.
.
.
.
.
.
.
.
.
.
2
Justification of the Study .
3
""
.)
The Obj ectives .
.
?revious Studies
.
4
Methodology and Organization of the Study
.
.
.
6
...
II.
J
CH~_~~CTERISTICS OF THE COCOA ECONO~Y
.
Background .
.
.
.
. .
. . .
7
Cocoa Tree Cultivation .
.
.
.
.
8
Cocoa Market Structure .
.
. .
. . .
12
Cocoa Terminal s
.
.
.
.
.
.
.
.
.
. .
.
.
.
20
Price Inst~bilitv
.
.
.
.
.
21
Supply Characterist:ics .
. .
. . .
.
22
De..rnand Characteristics .
.
.
.
.
.
. .
.
28
Search for an International Cocoa Agree..rnent
31
Ill.
DEVELOPMENT OF THE MODEL .
.
.
.
39
Theoretical Background .
.
.
.
.
.
.
.
.
.
.
.
.
39
Identification .
.
.
.
.
.
.
.
.
41
The International Cocoa Economy
.
.
.
.
.
.
.
.
41
The Economic Model .
.
.
.
.
.
.
.
41
Data Considerations
.
. .
. .
.
43
The Statistical Model
.
.
.
.
.
.
.
.
.
.
.
.
46
IV.
EMPIRICAL RESULTS
.
.
.
.
.
.
.
.
.
.
.
.
.
.
48
General Results
.
.
.
.
. .
48
•
Interpretation of Results
50
i,
Price Determination
.
.
.
.
.
.
.
.
.
.
34
1
V.
ALTERNATIVE STABILIZATION POLICIES,
SU~lliARY
f
AND CONCLUSION .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
59
I
Alternative Price and Earnings Stabilization
!
Policies
.
.
.
.
.
. .
.
59
Summary and Conclusion
.
61
fl
STATISTICAL APPE~DIXES .
.
.
.
.
63
D
I
,
BIBLIOGRAPHY .
.
.
.
.
.
.
.
.
.
71
I
II
VITA .
.
.
.
,
..,~
,::)
IIr,
I'
i i i
IlI

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LIST OF TABLES
1.
Distribution of the Export Ear~ings from Cocoa in
Ivory Coast
(Percent),
1965/66,
1974/75, Average
1965/66 to 1974/75 .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
•
17
2.
Prices to Producers in Four Xajor Producing
Countries and Average Spot Price of Cocoa
(Ghana)
in London,
1965/66-1975/76
.
.
.
.
.
.
. . . .
19
3.
Achievement
(in Hectares)
by Year
(1971-75)
and
Source of Fi~ancin~ of t~e Ivory Coast Regenera-
tion and Extension Projec~ .
.
.
.
. . . . .
29
4.
Esti~ates of Elasti8ities of Consumption of Cocoa
i~ ~hree Major Markets
.
~.
Xonth1y Coefficients for Inventory Ratio Expecta-
tions of New York Accra Spot ?rice,
October 1964-
Se~tember 1976
.
.
.
.
.
.
.
.
.
. . .
sa
iv

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LIST OF FIGURES
,-
1.
Treatwent of Cocoa Beans
.
.
.
.
13
Cocoa Beans Market Structures
14
3.
Cocoa Production by Region,
1961-1977
23
v

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CSAPTER I
INTRODUCTION
Im~ertance of Cocea
.
Cocoa is one of the most cultivated crops in rifrica
sub-Saha=a.
It is used mainly in the chocolate industry.
Consumption of cocoa, estimated in grindings,
has been
fluct~a~ing for t~e past years.
In 1977, about 1,371 theu-
sand me~=~c tens were consumed.
T~is is co~pared with 1,~77
thousand metric tons in 1974 and 1,387 t~ousand ~etric tons
in 1967.
Despite the fluctuation,
the tonnage cor.sw~ed tas
remained relatively high.
Apart from t~e importance of the world consumption,
cocoa is also a very important crop to the economies of
several producing countries which depend on this commodity
for its contribution to foreign exchange earnings.
Cocoa
accounts for about 60 percent of Ghana expert earnings.
In
1974, 76.6 percent of the farmers in the forest region of
the Ivory Coast had a cocoa tree plantation;
38 percent of
the farmed areas for the same region are in cocoa.
The im-
provement in technology and the expansion in the acreage
have induced a rapidly increasing production in cocca.
1,019
thousand metric tons were produced in 1960, 1,490 thousand in
1965, 1,510 thousand in 1976.
But, because of the weather,
1

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2
among other factors,
the production has not been consistently
increasing each year.
The Problem
In the mid-fifties, thi~ty percent of the world's cocca
consumption was by the U.S. and forty-one percent by the
European Community (EC).
In the years after the major
African producing countries have obtained their independence,.
cocoa consumpt~on has dec~ined in these two ~raditional mar-
kets in relation to the world conslli~ption.
In the early
sixties, the average ccnslli~ptions were twenty-two percent
for the U.S. and thirty-nine percent for the EC.
These
percentages dropped to twenty ar.d thi~ty-four. in the early
seventies and seventeen and thirty-one
..111 ....'
~~e
mid.-seventies.
It
The two fi~st International Cocoa Agreements
(ICA) of
I
1972 and 1976 contained provisions for export quotas and
buffer stockSi the export quotas called for control over the
f
quantity marketed internationally by means of national quotas
for the production or export of the supplying countries,
while buffer stocks set a minimum and maximum price for the
commodi ty to be maintained respectively by purchase-s or by
sales from stocks of the commodity in question.
The first
Agreement expired in 1976 without reaching its effectiveness,
as world prices remained above the range of 29.5 and 38.5
cents per pound throughout the three year duration of the
Agreement.
The new ICA, negotiated in fall 1975 and effective
October 1976, contained a higher price o~ 39 to 55 cents per

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3
pounc, but the U.S. was not a member of the rCA.
In s~~er
1979, a new renegotiation of the AgreeMent could not be ~eached.
A floor price of 112 cents per pound below which the buffer
stock must buy and a ceiling price of 168 cents above which
i t must sell were proposed.
A majority of exporters were said
to be willing to accept this range but the Ivory Coast, the
leading exporter was seeking a floor price of 120 cents.
Con-
Slli~ers were ready to agree to an ~pper intervention price of
155 cents, and the majority wo~ld accept 105 as the lower
intervention price, but the United States,
the leadi~g consumer
was said to be holding out fer 100 cents.
Justi=icaticn of the Stucv
The reliance of SOMe major producers of cocca on its
earnings and the decline of the traditional markets for this
commodity have made it ~portant that producing countries
examine very carefully the market relationships for cocoa.
The drop in the real value of cocoa and the instability in
prices seem to limit the economic horizon of cocoa.
The knowledge of the market relationships over the first
two decades of independence for the major producers could help
in policy making for the forecoming decaqes.
Objectives
This study has three objectives:
1.
To provide a background for understanding the cocoa economy.
2.
To determine the nature of supply and demand relationships
of cocoa for the major producers and consumers.

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4
3.
To discuss the implications of the results and make
suggestions for cocoa supply.
Previous Studies
Because of the expansion of the cocoa and products
industries i~ western Europe and the U.S.
in the past three
decades,
the cocoa market has received considerable analytical
attention over the same period of time.
Most of the studies
dealt with t~e demand side of the market.
Behrman
[25 and 26]
~ade a study of demand elasticity in the five leading conswu-
i~g countries for the period from 1950 to 1961:
France, West
Ge~any, ~etherlands, United States
(C.S.)
and the United
Xin;dom
(UK).
Instr~uental variables were used to obtain
consistent estimates for the ten equations defined:
one de-
~and for per capita grindings function for each country and
one demand for net addition to the average per capita stock
function for each country.
The income elasticities suggested
that the five countries might be ordered as follows:
the
Federal Republic of Germany, France,
the Netherlands,
the UK
and the u.s.
Behrman's next work was concerned with a
study
in which estimates were formed of the probable changes in some
of the relevant variables if an international monopolistic'
cocoa pricing agreement were implemented.
In 1965 Bateman
[24]
constructed an econometric model
.
to explain the supply of the Ghanian cocoa.
The major findings
of the study included the importance of cocoa and coffee prices;
the peculiar lag structure between planting and bearing;
the
importance of rainfall and to a much less extent, humidity;

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5
differences in soils and the age of the trees also explained
the differential ~es?onse o£ output to lagged cocoa and coffee
prices.
~eymar [221 did an econometric demand analysis.
He de-
veloped a theoretical pricing mechanism and found applications
for the cocoa market.
In the seventies the studies were more
concerned with the effects on producing countries and regional
studies.
Viton
(~970) was concerned ~ith long run impacts of
the low prices paid to producers by marketing agencies; Acquah
concent~ated on the effect of cocoa export inability en
Ghanian economy.
~ofi si~ulated the export earnings i~plied
by the 1968 Draft of :nternational Cocoa Agreement.
In tje
~id-seventies, Ad~~s and Behrman built econometric ~ocels :or
seme commodities including cocoa [11.
The most recent work en cocoa was done by Okorie and Bland-
ford in 1979
[27].
They looked into the world market trends
and prospects for cocoa.
The study covers the period from
1951 to 1975.
It is a four market demand analysis distinguish-
Llg the U.S., the European Community, Japan and the USSR.
The
dependent variables involved are the per capita consumption
of cocoa; the independent variables include .the cocoa spot
price, the per capita income, the sugar price
(the USSR demand
does not include the sugar price).
Ordinary least squares was
used to estimate the equations.
This study is the only one
giving any rationale to justify the functional form used.
Assuming that the D.S. and the European Community constitute
traditional markets with fairly constant elasticities, they

---

6
used the double-logarit~~ic form for these markets;
for Japan
and the USSR where cocoa is assumed to be classified as a
"luxury good," the linear form 'Nas used.
3ate:nan also used
a linear form for his supply function.
Methodologv and Organization of the Study
A descriptive-analytic approach will be taken to accomplish
the objectives.
Secondary data will be used for the statistical
analysis:.
The discussion is divided into five chapters.
The i~tro-
duction constitutes the first chapter and i~cludes a brief
. ,
descri?tion of the i~portance of cocoa,
t~e statement of -:.n.e
I
?ro~le~,
the justification of tne study,
the objectives,
the
~et~odology and ~he literature review.
I
In the second chapter, a descriptive survey provides
Il
background information on the characteristics of the world
tl
cocoa market.
Also,
this chapter covers the role of cocoa
marketing channels.
An economic and statistical model,
representing import
and export equations for cocoa,
is constructed in the third
chapter.
Empirical results are presen~ed in chapter four.
The
last chapter is devoted to the implications, the summary and
conclusions that can be drawn from the results.

---

CHAPTER II
CHARACTERISTICS OF THE COCOA ECONOMY
Backaround
<
The modern history of cocoa starts with the discovery
of the .~erican continent by the European world.
Originally
f=om the northern ?art of South &~erica, it was cultivated by
t~e ~aya ?09ulation.
Its appreciation came from its associ-
ation wit~ the sugar extracted f=o~ the cane which was t~en
int=oduced in the West Indies.
Until t~e beginning of
nineteenth century,
cocoa was considered as a luxury product.
The ?roduction expanded in South ~~erica and the West Indies.
The Portuguese introduced i t in Fernando Po and Sao Tome,
and the French in Madagascar in 1800.
In 1851, cocoa appeared
in the Gold Coast
(Ghana today),
for the first time on the
African continent.
The expansion of the confectionery industry in Europe
increased the demand for cocoa and rapidly,
there was an
expanding acreage in the African colonies.
Theobroma cacao is a member of the Sterculiacae family.
There are about 23 species in the genius theobroma, but
theobroma cacao is the only one of economic importance.
It
is a tropical perennial tree that bears peds along its bark.
The pods contain the cocoa beans which can be processed into
both cocoa and chocolate.
7

---

8
Cocoa ~ree Cultivation
The cocoa crop year runs from October to SepteIT~er.
During this period,
two harvests occur.
The main cro~
from October through ~arch, accounting for nearly 90 ~er-
cent of the total crop, and the mi-crop from April to
.;;'ugust.
In the best conditions, the first production
appears 4 to 6 years after planting; then the tree continues
to produce for many years.
~hree types of cocoa are cultivated:
i)
Criollo,
i:')
~~azonian Forastero and iil)
Trinitario.
i)
The Criollo type was originally ~roduced in Venezuela
.
-
3.n.d t::e term "CrioL.. o" illeans native.
It prov:.c.es t~e
~
re:l.neC1
cocoa, and is mere aroma~ic and ~erfect for t~e high quality
chocolate industry.
3ut, because of its weakness and its
sensitivity to diseases,
i t is not cultivated in large numbers.
ii)
The &~azonian Forastero ma~es up almost the whole
current cocoa produced in Brazil and West Africa.
It repre-
sents 80 percent of the world production.
In the group, the
~~elonado of West Africa, relatively homogeneous, constitutes
almost the entire African plantations.
The "Amazonian cacao,"
selected in 1937-1938 to stop a fungi disease, the "broom of
witch," were introduced in Ghana in 1944 and diffused into
Ivory Coast and Nigeria.
iii)
The Trinitario is an hybrid obtained from the
crossing of the two first types.
The cocoa tree needs a soil with high percentage of phos-
phorus ar.d low percentage of nitrogen.
Whether cocoa will grow

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9
in the absence of ~rrigation is dependent on the distribution
of rainfall and the type of soil.
~ost cocoa is grown in
rainfall above 50 inches
(12iO millimeters); consideration of
the total rainfall only is sometimes misleading as the distri-
bution throughout the year is also important.
The minimum
temperature for a commercial scale cocoa cultivation is
limited at 15°C
(59°F).
The average annual temperature should
not be less than 21°C
(70°F).
The lower temperatures may be
the chief limiting factor at altitudes higher than 2000 feet.
The light intensity is primordial to the cocoa tree.
The use
of shade tree cont=ols the awcunt of light admitted to a
pla:::ta tio:l.
The cocoa t=ee has many enemies among insects, bacteria
and virus.
The capsid insects which feed on the leaves, the peds
and the young branches and weaken the tree if infection is
great enough, are some of the major insect enemies.
The
two most damaging are Sahlbergella and Distantiella that have
caused great havoc in the past, "particularly in Nigeria, Ghana
and Ivory Coast.
The major fungi diseases are the "Black Pods"
caused by Phytophthora Palmivoraandthe "Br"oom of Witch" by
~arasmius Perniciosis.
Some cochineals carry virus that cause
I
the "swollen shoot" which is the most important virus disease.
Proper spraying, cutting out diseased trees, eliminating
\\
infected pods at early stages are some of the measures taken
to protect plantations.

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10
Cultivation of cocoa trees takes place on smallholdings
and large plantations.
In 1974-75, t~e Ivorian ~inistry of Agriculture conducted
a survey on cocoa and coffee plantations in the country [3lJ.
A typology study was carried out on t~e results of this sur-
vey.
Two production sectors were disti~guished:
the large
plantations classified as modern with more than 100 hectares
and the small plantations or traditional with less t~an 100
~ectares.
Lar;e plantations operate with substantial capital
a~d e~ploy pe~a~ent salaried lator.
Small plantations use
~or2 :~~ily lator, but at tar"lest time particularly, t2mporary
lator is often necessary.
Low level of technology ctaracteriz2s
t~ese units also.
Traditional plantations make up the ~ajority
of the producins ~nits in the ~orld; the survey of 1975 in the
Ivory Coast revealed t~at ~ore than 99 percent of the planta-
tions are traditional.
nowever,
there are some large planta-
tions in South ~~erica.
In countries such as the Ivory Coast in West Africa,'
coffee can be a very competitive crop.
Sawadogo
[18J
found
that in 1975, 920,000 rural families owned.a coffee or cocoa
plantation; 76.6 percent of the farmers in the southern areas
owned a cocoa tree plantation and 91.2 percent a coffee tree
plantation.
The cocoa tree requires a lot of care during the first
three years after planting; when t~e tree starts produci~g,
the harvesting operations and after harvest care are very
L~portant.

---

11
After the harvest, the next operation is the extraction
.
of ~,
~ne
oeans out of the ~ods.
This operation is generally
manual.
The fermentation process followSi
the separa~ed
beans with adhering pulp are transferred to heaps, boxes or
baskets for fermentation to take place.
Most of the beans
are fermented in heaps.
Banana or plantain leaves are put
under the beans and also used as cover for the heap.
Fermenta-
tion lasts about a week.
I~ is necessary to give occasional
illixing to aerate and expose all the beans to homogeneous
~e~perat~=e conditions
[14,
9. 10].
Af~er the fermenta~ion the beans are placed in s~allow
t=ays to d=Yi
in most of the producing areas,
s~n drying lS
~idely ~sed.
A=tificial me~hods can also be utilized to
save time and labor.
Eight ~ercent mois~ure is general:y
acce?ted as the cri~ical up~er limit above which ~olds will
develop.
!
Care during t=ansportation and storage ought not to be
f
t
\\
neglected.
The storage should fulfill the moisture require-
ment and the beans should be protected against insects and
smoke odors.
A large number of farmers do not ferment and
dry their beans properly, thus leaving them with'~ather high
bacterial count and a tendency to mold or rot.
Fa~er educa-
tion and small regional drying centers created in producing
areas are undertaken by the Ivorian Ministry of Agricul~ure.
In short, the chocolate industry expects to find a
product:
-
as dry as possible,

---

12
-
as rich as possible in fats,
- with a ho~ogeneous granulometry,
-
t~at will yield a chocolate flavour after roasting.
Manufactured products from cocoa beans are:
cocoa paste,
cocoa powder,
solubilized cocoa powder, cocoa butter and all
kinds of chocolate
[Fig. 1].
Cocoa Harket Structures
Arthur s~~arized the cocoa market structures in the
chart shown in figure 2 [4J.
Three ~ajor fo~s of marketi~s systems are utilized in
the move~ent of cocoa beans from the ?roducing areas to the
conslli~i~g areas:
~1arketing Boards, Caisses de Stabilisation
and ?rivate Exporters.
~arketing Boards in Ghana and ~igeria are monopsonies that
set a guaranteed producer price at the ceginning of every
season.
Purchase of all cocoa produced is also guaranteed.
They are also statutory monopolies responsible for all
oversea sales of commodities through one central agency.
In
items of their basic structure the boards have not changed
markedly since their establishment after the second World
War; however,
there have been shifts of emphasis between their
four major objectives of:
i)
stabilizing producer prices;
ii)
taxation;
iii)
the maintenance and promotion of the aualitv of
~
~
exportable produce;

---

13
Figure 1:
Treatment of Cocoa Beans
Arrival of beans at factory
~
f
preliminary cleaning
i
I
~
weighing
~
•
transferal to silos
J
~
.
h
portions taken to process~ng .oppers
~
cleaning
~
air cooling to room temperature
. ! .
w~nnoTN~ng
::i.:::;/stel2.
_______~~ shell removed by
air current
produce nibs
~
turbo :nills
If
screenl~g to remove coarse particles
~
olates to correct particles size
-
~
~
l
cocoa liquor
cocoa press
(7000 lbs/sq.
inch)
~
,
cocoa butter
powder cake broken into lumps
t.
ground to s~ze
~
cocoa powder
Source:
R.
Lees and E. B. Jackson, Sugar Confectionery and
Chocolate Manufacture
(New York:
Chemical Pub. Co.,
1975),
p.
120.

---

l-!
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---

iv)
the development of a local cocoa processing industry.
The aim of the marketing ~oards as was originally exposed,
was to stabilize the price received by producers and to
mobilize savings as an instrument of stabilization, the object
t
of which is to withhold part of the produce~s' income in
i
periods of high prices and to supplement that income of
I:
producers in periods of low prices.
There were no conscious
,I.l,
efforts made to use i t as an instr~~ent to siphon off pro-
,
ducers'
income for the ~urposes of national construction; but
quickly,
tte market~ng 30ards became ~ax collection agents
..L:':
,. . .
for ~te gcver~~ent.
~
_'4 :.·;er::a,
export 2rops bec~~e subject
to t~ree different taxes,
namely export cuty, produce sales
ar.d "s'..lrpl 'U.s 11 'tlhich a:::-e collected by Ma.:-~eti::g Soa.:-:::.s.
the case or cocoa, the prcd'U.ce sales tax is ca:::-:::-ied out by
underpaying the farwer and tte collection is remitted to the
government treasury.
rllthough the surpluses withheld by the
boards are intended to be paid back to farmers in bad years
to stabilize prices and to some extent the producer's income,
only part of the "surplus" is s.o used.
Bet'tleen_ 1947 and 195..4-,
over 39 percent of potential producer income ~rom coco~ wera
withheld by the government through taxes apd "surpluses"
L28].
From 1947/48 to 1968/69, about 29 percent of the total sales
value of cocoa was transferred to the Ghana government by the
Cocoa Marketing Board
[27].
In the French-speaking areas of West Africa,
state corpora-
tions te~ed Caisses de Stabilisation have been used to stabi-
lize prQducer prices.
Although they act as stabilizers by

---

16
fixing a guaranteed price to the producer, they do not bUy
directly from t~e producer.
Private agents purchase cocoa
from t~e farmers and arrange transportation,
storage and
exports.
Buffer funds are obtained from the net price difference
between export cost and export price in economically favorab1e
I
periods and from earni~gs from its investments.
Among the
I
elements that influence the price guaranteed to the Ivorian
j
producers are the following:
the international market sit~ation;
the reserve position of the Caisse de Stabilisation; the govern-
ment revenue res~ire~ents; the income distribution policy of
\\~
the gcver~.ent; and tte relative incentives t~at the government
!F
!
intends to give to tje producers of various crops.
~he proceeds =r~m selling cocoa in the wcrld market are
divided among tte :ar~ers, ~~ose involved between farm and
~ort (such as processors, traders, and transporters), the cen-
tr
tra1 government
(in the form of taxes)
and the Caisse de
Stabi1isation (Table 1).
On the average, over the period 1965/66 to 1974/75, the
farmer has received about 50 percent of the earnings from
cocoa.
In the crop year 1965/66, high production of the
previous year has driven down the price of cocoa.
Caisses
de Stabilisation were obliged to pay a deficit to producers.
Forty-nine percent of the f.o.b.
price of cocoa came·out of
•
the Caisse funds to pay the producers who could then perceive
80 percent of the price.
Since 1963/64, and except for 1973/74 and 1974/75, the
average earnings of the Caisse from cocoa and other crops

---

17
TABLE 1
DISTRIBUTION SF THE EXPORT EARNINGS FROH
COCOA IN IVORY COAST
(PERCENT), 1965/66, 1974/75,
AVERAGE 1965/66 TO 1974/75
Average
Recipient
1965/66
1974/75
1965/56 to 1974/75
I
I,
Farmers
80
53
50
i
Transporters, traders
36
la
12
I~
Government
(Export tax)
33
13
22
I
C",';--o de Stabi1isati.on
-49
24
16
--~~-
l&.I
:.0.3. ?:-ice
100
100
100
r
a
'?'..lb1ic Sector
-15
37
38
"
~ote:
Years are ero? yea:-s.
a.
Government export tax ?lus Caisse de Stabilisation
Source:
A. Tuinden 3astiaan.
Ivorv Coast:
The Cha11enae of
Success
(Baltimore:
The John Hopkins University
Press), 1978, p.
81.

---

18
have been C~A francs 6.3 billion a year
(about D.S.
$26
million).
The revenue had been used to pay administrative
cost of ~he fund of about CFA francs 1.5 billion a year.
Contributions a~e ~ade to the international organizations
managing the various commodity agreements and for subsidizing
experiments in diversification of the agricultural sector
and of the processing industries.
The substantial difference between the producer price
u~der ~arketing 30ards and Caisses de Stabilisation policy
and the i~ternaticnal prices
(7able 2)
can be a source of
disatisfaction and disincentive for production.
~~ong 9ro-
d~cing countries the~selves, prices paid to the producer
va~y considerabl:' from country to country.
T~ose price
c~=ferentials te~d ~c promote smuggling ~etween countries
'tii th a ccmrnon border sue::' as Ivory Coast and Ghana.
Outside the major West African countries, marketing of
cocoa is generally done by private trading firms,
or in some
countries, by producer cooperatives.
In Brazil, after a long
stagnant period of cocoa output, the Commissao Executiva
do Planode Recuperacao Economica da Lavoura Cacaueira
(CEPLAC)
was set up in 1957 as a statutory body for the rehabilitation
of cocoa plantations.
Its revenues come from levies on the
exports of raw cocoa and cocoa products.
It does not maintain
guaranteed prices to the producer, but minimum export prices
are fixed by the Export Trade Department of Banco do Brasil
(LACEX).
Private exporters act freely within this framework
[19,
p.
360J.

---

19
TABLE 2
PRICES TO PRODUCERS I~r FOUR Y1AJOR PRODUCI~G
COUNTRIES A)ID AVERAGE SPOT PRICE OF COCOA
(GHANA)
IN LONDON, 1965/66-1975/76
(L per metric ton)
Prices to Producers
Spot Price
Crop Year
London
(Ghana)
Ghana Nigeria Ivory Coast Cameroon
Average
1965-66
75.78
72.17
85.97
80.14
193.23
1966-67
85.02
90.22
103.39
96.19
238.01
1967-68
101.23
100.60
l13.09
:'13.03
319.54
1968-69
l11.74
143.53
117.47
120.60
415.48
::'969-70
119.97
174.13
123.80
128.33
308.53
1970-71
1::'6.92
177.93
125.23
::'29.20
232.40
1971-72
102.62
177.98
134.71
142.64
270.49
I~6'
1972-73
135.65
201.19
170.30
170.30
585.35
1973-74
181.00
313.35
223.99
190.21
990.14
1974-75
226.29
443.39
367.51
256.31
722.74
1975-76
327.13
547.30
410.06
317.39
1399.44
Source:
Gill and Duffus, Cocoa Market Report No.
287,
9/3/1979.
\\IIiII
ft,

---

20
Cocoa Terminals
The establis~~ent of futures in cocoa owes its origin
essentially to the growth in the volume of world trade.
Most cocoa crops are harvested from October to the end of
January;
the growth in warehouse stocks increased the need
a~ong traders to hedge their stocks and committments.
The major cocoa te~inals are located near the main con-
sumption areas.
Those markets can be characterized according
to the nature of the underlying contractual arrangements.
:'larkets can be iden tif ied as "spot :nar:<ets 11 '•..rhen thev feature
9hysical exchange of the co~~cdity and ccnt=acts specifyi~g
delivery on -C:1e spot.
T~ey a=e ter:ned "futures ;:;arkets" -,'ihen
they involve the exchange of pape= contracts that specif~
forNard delivery accompanied . .
~y
-cer.ns
'~-'
perm~~~lng easy t=ansfer
of liability
[3,
9.4].
The major cocoa markets are located in London, New York,
Paris, Hamburg, Amsterdam, and Le Havre.
The London Cocoa Exchange operates in both spot and
futures markets with a trading unit of ten tonnes of cocoa
beans.
The Sterling is the currency dealt in and f5 is the
minimum fluctuation per contract.
London, Liverpool, Avonmouth,
Hull,
the borough of Teesside, Amsterdam, Antwerp,
Hamburg
and Rotterdam are the delivery points and March, May, July
September, December, March, May,
the delivery months quoted.
The ~ew York Cocoa Exchange also trades in spot and futures
markets, but with a trading unit of 30,000 pounds.
The U.S.

---

21
dollar is the currency dealt in and price movements use
six cents per pound above or below the previous day·s settling
o .
_r~ce.
T~e
...
standard grades of cocoa beans are as follows:
Ghana of t~e oain crop; 3ahia; Sao Tome, above or superior;
Ivory Coast main crop, fermented; Costa Rica, fermented;
Panama; ~igeria main crop.
T~e delivery points are the Port
of New York District, Port of Hampton Roads, Delaware River
Port District.
T~e Cocoa Terminal
Paris Commodity Exchange
!I
trades only in f~tures.
T~e contract volume is ten tonnes
\\
and ~~e c~rrency .
..\\.,
~s
...,.e =:::-ench francs with a maxiw~~ fluc~u-
ation ~? or down allc~ed during a session of 90 fra~cs ?er
100 ~ilograms as against the ?revious margin call.
regulated market of cocoa beans is based on good fermen~ed
~ain crop cocoa beans from Ivory Coast.
The connodity is
delivered at ~arseilles, Sete, Bordeaux, Le Havre, Dunkirk,
Amsterdam and Hamburg.
Price Instabilitv
Cocoa is one of those commodities that experience large
price fluctuations.
F. H. Wel~ar
[22]
has found it useful to
separate cocoa price movements into long, intermediate, and
short term cycles.
The time lag between the initial planting and the peak
production of a plantation can represent the ~ term cycle.
High prices following a shortage of the product create high
expectations and encourage new planting and replanting
\\t

---

22
(replacement of old trees by ~igher-yielding trees).
When
the new t=ees reach tteir peak production,
~otal output
increases sharply and the prices are driven down.
Inte~ediate-term price ~ovements are the results of
annual fluctuations in cocoa production.
Diseases, weather
conditions strongly affect the production.
Short-ter~ cycles have period of from several days to
several months and are due to a variety of factors including
the transportation problem, the inventory decision by large
processors,
the speculative Guying and selling linked to
changing i~fo~ation.
Suoolv Characteristics
. .
Most of the world cocoa comes from West Africa,
South
i
of Sahara and South ~~erica [Fig. 3].
Over the past t:vO
I
I
decades,
five countries from these regions--Ghana, Nigeria,
I
Ivory Coast, Cameroon, and Brazil--have provided about 80
percent of world production.
Although this percentage still
remains the same today, an examination of the performance of
the five leading producers reveals some shifts in production
shares over time.
In the 1960/61 season, cocoa bean produc-
tion shares were:
Ghana 38 percent, Nigeria 17 percent,
Brazil 10 percent,
Ivory Coast 8 percent and Carneroon 6 per-
cent.
In 1976/77 season, those shares become 24, 12, 17, 17,
I
and 7 percent respectively.
During the period 1960/61-1976/77,
Ghana has consistently maintained its position as the world's
leading producer, despite experiencins a declining share relative
l

---

t
II!
I)
I
'.. - .'- _.. ,
./
...-----',
.... ~.,............... _-
.'
-
,
,
.. . --..;.,
/
._- - ..........--_
,
....-
.'
: : 'J
.. -
~~i! s:'
-...
.-...:
_
::r:::z 3
_.-...
_ _ _--.,;.
~.~.
~
•. _ __.. ~_._-",-~_::"">-c"'-.....;-.;.;"-~·--·--"---"
--_.-.
-_"
.~.
__._._----_.
~.... - --
, ;
..... - .

---

24
to the other procucers.
~igeria has =allen from second place
in 1960/61 to rou=th behind Brazil and Ivory Coast in 1976/77.
Recent statistics showed that the Ivory Coast shared the first
position with Brazil in 1978/79 with a production approximated
at 312,000 metric tons
[291.
Blandford and Okorie
[27]
uncerlinec a relevant feature
of the relative changes in outpu~ in the five countries.
Brazil
and Ivory Coast--whose governmen~s have maintained =elatively
consistent polic~es en cocoa indust=: improvement--have ,...l.. -
... .i.-
creased their share,
while count=ies who have not,
~ave expe=i-
encea a declining share.
~ach ef the two producer categor~es--
"i.::creasing share" ar.a "c.eclir:ing 5hare"--ha?e things i:1 corrJ7:cn.
~'ihile the increasing sha=e coun~=ies have had r:1ore stable govern-
ments,
the decreasing sha=e producers have experlenced great
political instability,
with freq~ent changes of government.
World cocoa bean exports follow closely the prcduction
pattern because most of the production is exported under its
raw form.
However,
in some cases the level of local processing
is not negligible and the export-output ratio is a good indica-
tor of it.
In 1961, Ghana,
Ivory Coast and Nigeria exported
94 percent of their beans.
Brazil exported 85 percent.
In
:;
1977, those ratios were .78,
.68,
.94,
and .46.
Brazil
processes a relatively large part of its production.
Several
international food companies are involved in both cocoa pro-
\\
cessing and confectionery in Brazil.
~igeria has so far given
[r
little interest in cocoa processing.
One cocoa processing

---

25
plant, a government owned factory in Ikeja, and a few con-
fectionery industries ~tilizing cocoa.
Ghana has three
factories in Takoradi a~d Tema.
Ivory Coast has four
processing plants in Abidjan.
The first facil~ty was the
Societe Africaine de Cacao
(SACO)
factory which started
operating in November 1964.
The French Barry Group owns
this plant.
The government-owned plant, the Industrie de
Transformation des Products Aaricoles ooened in May 1974.
<
~
A third plant, Chocolaterie et Confiserie de Cote d'Ivoire
(CHOCODI), opened i~ ~id 1976, wit~ join~ ownership ce~ween
the Cacao 3arry Group ar.d Private Ivorian interests.
~te
fourth plant, Societe de Produit de Cacao de Cote d'Ivcire
(?~CCACI) oDened i:1 ~977 and is 60 percent ow~ed by :vcrian
interests and 40 percent by Interfood,
a Switzerland cased
company.
~he total capacity of these factories is in excess
of 100,000 metric tons annually but actual grindings are
below this .level.
Although i t is logical that great importance should be
attached to the promotion of agricultural processing industries
such as cocoa in the producing countries
(LDC's)
because it
increases foreign exchange earnings and creates employment and
incomes, competition on the world market is keen and entry
of new industries may be difficult.
A contraction or expansion of supply in agriculture may
be the result of a change in production cost, a change in
technology, a change in the number of croducers or a change
in weather.

---

26
T~is section deals specifically \\vith the change in
technolcgy understood as i)
replanting with higher-yielding
varieties, ii)
expansion of the acreage,
and iii}
utilization
of fertilizers and pesticides.
i)
Reolantinq with hicher vielding varieties.
The opera-
tion consists in replacing old trees with low yielding capacity
with new varieties with higher yielding capacity.
It has been
ar~~ed that t~e concept of average yield ~er acre has little
~eaning in West African conditions.
~he fa=rners are unaccus-
tomed to thinking in terms of yield per unit area for any
~roc.
~at~er, t~ey consider yield ?e~ unit 0: ef~ort, or
vield ~cr a certain cash outlay on labor [13. ;. 132J.
m,,",'_
.:. •• 1..:>
~ay expla~r. why replanting programs were not always accepted.
Besides,
~~e farmer's income ,viii remain reducec for at least
four years, time required ~y the new material to start produc-
ing.
Government intervention is necessary to L~plement the
policy.
In Ivory Coast, the government is fostering increased
production by offering farmers making new plantings a subsidy
of 60,000 CFA (D.S. $280)
per hectare.
The payment comes in
two installments, the first after planting has been achieved
and the second about a year later--provided the farmer has
properly maintained the newly planted area.
The subsidy pro-
gram is administered by the Ministry of Agriculture through
the state corporation SAT~~CI.
This regeneration project
started in 1963.
By 1974, 231,656 hectares owned by 41,746
farmers were replanted.
SAT~ffiCI provided the vegetal material
to the farmers
(hybrids, Trinitario x ~~azonian, Amelonado x

---

27
Amazonian, or polyclonal Amazonian)
[31/
p.
23].
The ~ew
material is to improve the yield from 250-300 kilograms of
cocoa beans per hectare to 500-700 kilograms per hectare.
ii)
Acreaae exnansion.
This is the most common uncer-
<
-
taken operation in the major producins countries of West
Africa.
Availability of land and favorable prospects of the
cocoa industry have caused large migrations of population to
the cocoa producing areas after t-lorld ;var I1.
Tl1e misrants
had provided temporary or ?e~anent 12bor.
Some bought
their ow~ land and started new plantations.
In Ivory Coast,
:vorians fron tl1e :rorth and pcpulaticns frc:n :1ali and Cpper
701ta ~oved Sout~ i~ the ~orest zone.
Gover~~ent acreage expansion projects also have been
undertaken.
Since the ea=ly seventies, the state organization
under the Ministry of Agriculture,
SAT~mCI which is in charge
of the modernization of the coffee and cocoa production, has
helped in the creation of new plantations using higher yielding
hybrids and modern procuction methods;
those hybrids have been
selected at the coffee and cocoa research center,
"Institut
FranGais du Cafe et du Cacao"
(IFCC)
and are characterized by
a high precocity; procuction of pods is expected three years
after planting instead of seven in traditional plantations.
These hybrids yield one metric ton to one and a half metric
tons of cocoa beans per hectare after the eighth year,
if con-
ditions are favourable.
The regeneration and the extension project is jointly
financed by the World Bank, the European Development Fund
(EDF)
II!

---

28
and t~e Ivory Coast
(~able 3) .
~he impact of these
projects has yet tQ be reflected i~ Ivorian production statis-
tics, as output :rom them has barely begun.
iii) Fertilizers and pesticides.
The use of pesticides
has provided so far more satisfactory results than fertilizers.
Pesticides are widely used for t~eir effective responsiveness.
Positive results from research centers on fertilizers are
recent and Brazil and ~!alaysia have experienced a wise use.
Because of the risk and uncertainty invQlved in replanting
a~d also t~e ~igt labor cost required, the farmer often ~re-
:e=3 %eeping his old trees t~at he can spray if any disease
Jenand C~aracteristics
The developed ~ations of Western Euro~e, North &uerica
and Japan and the centrally-planned economies of Eastern
Europe L~port more than 90 percent of the world's cocoa beans
and products exports.
They are also the main consumers of
cocoa.
The European Community constitutes the single largest
market bloc.
On a single country basis, the United States. is
the largest importer and consumer.
The ~eading importer of
cocoa butter is the United Kingdom (14 percent of the 1975 world
total).
Other major importers are the Netherland?, the Federal
I
RepUblic of Germany.
The USSR and Japan have imported con-
\\
siderable quantities of cocoa butter, especially since 1963
i
t
and jointly accounted for 14 percent of 1975 imports.
Consumption of cocoa in important countries is often.
measured by the level of grindings.World grinding~ rose ~teadily

---

'1' A lILE
3
ACHIEVEMEN'l'
(IN BEC'f'ARES)
BY YEAH.
(1971-75)
AND SOURCE
OF FINANCING OF THE
IVORY COAS'l' HEGE:Nl::HA'1'TON AND EXTENSION PHO.1EC'l'
Regeneration
Extension
Year
. _ - -
- - - - - - _ . _ - - ~ - - - - - _ . _ - - - -
Total
Worl~ Bank
Ivory Coast
'fotal
\\r-Jorld Bank
Ivory Coast
EDF
-----._._--- -
1971
4,578
4,578
1, 3 GI)
1,172
2,537
1972
11,501
11,501
4,000
4,146
8,152
IV
~
1973
8,512
0,512
4,104
5,973
10,077
1974
7,800
8,140
2,110
18,050
1975
n,325
11,610
3,065
23,000
- - -
16,076
0,512
24,591
25,GOO
31,041
5,175
61,816
.. -_.----_._---
Source:
Ministry of Agriculture,
Ivory COdst,
J976.
~
,..~.
_.""~
.~"
,.~
_"_~_.
' " ' " ' " ' -
' - " " " " - " ' . ,
·W.
R N
.<
"
,._
-
"
_
• . .
__
.. _
_
_
_ •• _".,.._ ..
" " - _•._
.

---

30
during the 60's and reach a peak of about 1.56 million tons
in 1972.
Following the 1973 oil price increases, the developed
nations cut back on grindings as manufacturers adjusted to
high prices and to uncertain market prospects in a period of
general economic recession.
The U.S. grindings fell by 18
percent during 1974 and the EC grindings by 11 percent.
Although
the last prospects indicate that the USSR is increasing its
grindings, and also some producing countries such as the Ivory
Coast, the general outlook remains downward.
In appendix to
t~e study, net imports and grindings for the ~ajor markets are
presen~2d.
~~e use of cocca can be reduced in several ~ays.
One is
~, t~e subst~t~tion of other fats and oils for cocoa nutter.
~~ot~er way is to reduce the cocoa content o~ enrobed bars
or filled chocolate oars, although in certain countries,
including the United States, a product may not be sold as
"chocolate" if i t contains more than a specific proportion of
fillings substituting for chocolate.
A third way is to limit
cocoa usage by reducing the size of chocolate bars to maintain
the same retail price per bar for a period of ti~e.
Because
of its chemical stability and also its price, coconut oil is
a prospective substitute for cocoa butter.
Decision of
going on diet by a large population can reduce consumption of
chocolate.
Other ingredients of the chocolate industry are sugar and
milk.
Both cocoa and sugar prices are SUbject to wide fluctua-
tions.

---

31
Search for an International Cocoa Agreement
P~essures for International Commodity Agreements frequently
arise because freely functioning world trade in particular com-
modities leads to market conditions deemed undesirable by either
producers or consumers.
.~ong the prL~ary causes of market
instability are:
i)
Dependence upon industrial markets and the instability
of these;
ii)
Peculiarities of various elasticities;
~ii) Technology in ?roduction, use of substitutes to t~e
co~~odit~ in question;
iv)
~1ars, natio~alisrn, 3nd market i~~er~e=ence; and
v)
Speculation
:12, ~. 2].
Agricultural cor.~odities such as cocoa are produced in
developing coun~=ies but ~ostly cons~~ed in industrialized
nations.
Law argued that there have been, historically,
fairly
great fluctuations in demand for final products of certain
industries in conjunction with the business cycles in the
advanced countries.
As the ultimate consumer reduces his
orders of the product, both wholesaler and retailer t r i to re-
duce the size of their stocks to a given relationship' with their
sales.
The manufacturer will try to reduce his stock of both
finished products and raw materials.
As the consumer decides to
increase his orders,
the opposite phenomenon occurs.
This com-
bination of events tends to make prices, quantities, and total
receipts move in a much more volatile manner than they would

---

32
if demand for final product were the direct, rather than this
multiple,
influence.
It has been argued that there is small responsiveness
of quantities either supplied or demanded in most primary
commodities to a change in price of these commodities.
Stipu-
lated in another way,
the price inelastic supply and demand
mean that a relatively small percentage change of either the
supply or the demand may be expected to cause a more than pro-
portional change in price.
~lost of the cocca prod~cing countries have this cc~~cdity
.
as one of the leadi~g crops; therefore, efforts are u~dertaken
to i~prove the ?rcducticn every Year.
This result is a scme-
w~at i~creasing 9roduction over ti~e, es?ecially when weather
conditions are favourable.
The African production reached 1,183
thousand ~etric tons for the first time in 1963 because of
particularly good weather.
Law pointed out another relevant reason for supply inelas-
ticity, that is the pattern of low variable costs combined with
high fixed costs.
In the case of cocoa, the fixed costs of
t
investment in farm,
planting, cultivating,
spraying, and other
activities necessary to bring the trees to the stage oj produc-
I
tion are much higher than the variable costs consisting only of
I
those necessary to harvest and market the crop.
In this situa-
tion, i t appears that current output falls very little in re-
sponse to a price decline, even if an inelastic demand situation
would enable curtailment of output to increase total revenue.
The marginal cost of harvesting the full crop is less than the

---

33
ma~ginal revenue received, so there is no ma~ket restraint
~n ?roduction.
Technology in oroduction can be a cause for price in-
stabili~y ~ecause of its relationship to the supply function
which has ~een discussed above.
Technology related to the
finding of substitutes is another reason for price fluctuation.
Rising costs of raw materials may stimulate activity seeking
lower cost substi~utes in some industries.
S?ecula~ion can also affect prices.
Depending on ~he
acc-...:rac'.r ef infor::lation,
s?ecula~ion can either stabilize or
ces~abil~:e ~rices.
:n~e=national CCITmcdi~y Agreements
(reA's)
are used to
...... ~1 -
-
... .:::l
;;Jw, ..... ,:)--
Stabiliza~ion of volatile prices;
Stabilizaticn of cc~uodity export income rather than of
price.
~nprecictable variations in export revenue are lif.ely
to create problems in a country's long-te~ investment program,
and to inconvenience and destabilize its internal economic
policy, with negative repercussions on the pace of development;
- Assure a steady long-term growth of price or incomes.
reA's can take any of the following forms:
i)
Export restriction scheme:
there is a control over
the quantity marketed for the production or export of the
supplying countries.
This scheme expects that a reduction in
demand will be met by a greater reduction in supply, with the
hope that the sha~p rise in price would compensate for the
decline in quantity,
leaving total foreign exchange earnings
unchanged.

---

34
ii)
Buf=er stocks:
this scheme set a Qinimum and maximum
price for the commodity to be maintained respectively by pur-
chases or by sales from stocks of the commodity.
The oojective
here is to maintain the price within a predeter~ined range.
iii) Multilateral contracts:
this scheme specifies a
~rice range within which specific quantities are traded.
The history of the cocoa industry reveals that price
stabilization has been of much concern since the early 1920's.
But the most significant steps ha7e been accomplished in the
iast two decades toward an International Cocoa rlsreement.
Cocoa is the first cor.~odity that has gone through the stages
of cesign, negotiation, and implementa~ion under the auspices
c: t~e C~~ted ~a~icns.
In ~he abse~ce of a~ rlg=ee~e~t,
~ajor producers--
Brazil, Cameroon, Ivory Coast, Chana, and Togo--had formed
the Cocoa Producers! rllliance
(CPA)
in 1962.
This was an
attempt to prevent the continued decline in world prices by
restricting sales.
The objectives stipulated in the Alliance
were:
a) To adjust the supply and demand of cocoa;
b) To reduce the sharp swings of cocoa p'rice's for the
interest of the producers;
c) To create conditions that will assure a regular supply
to the consumers and profitable prices to the producers;
d) To increase cocoa consumption in both the consuming and
producing countries.

---

35
Ctapter seven of t~is Alliance elaborates the restriction
scheme.
~~e features of those restrictions are that any pro-
ducer nation with an annual production of less than 10,000
metric tons over the years of reference,
is not subject to the
restricticns.
~~nual and quarterly restriction sales are
assigned to each member after study of production and consump-
tion forecasts.
Gnfortunately, record production in 1964/65
coupled with a high level of ex~sting stocks in consuming coun-
tries led to the brea~do~~ of CP~ effcrts.
The production
reached 1,306 thcusa~d ~etric ~or.s and t~e existing stock was
588 thousand ~etric tons,
the hiqhest total up to that ti~e.
:vcr~ Coast and Ca2eroon,
unable
to withhold supply fron the ~arket and began tc sell at prices
After several attempts be~~een prcducers and cons~~ers,
the ~~r Cocoa Conference in October of 1972 in Geneva finally
adopted an International Cocoa Agreement to operate from October 1,
1973 to October 1, 1976.
The highlights of the agreement were:
i)
operation of annually-determined and adjustable export
quotas;
ii)
provision for a buffer stock of a minimum of 250,000
tons of bulk cocoa;
iii)
existence of an "indicator price."
It is the average.
of daily prices established over a 15 consecutive business day
period.
The range defined for the "indicator price" was a mini-
mum price of 23 D.S. cents and a maxim~~ price of 32 u.s. cents
per pound, which determines adjustments ~ade en cruotas.
As an

---

36
example, \\V'hen tl1e "i::dicator price" T,-las greater than the
minimum price and less or equal to the minimum price plus 1
G.S. cent pe~ pound, t~e export restrictions applied were 90
percent of tl1e annual export restrictions.
When the "indicator
price" was equal to t:J.e maximum price,
sales of tl1e regulating
stocks took place.
iv)
countries producing less t~an 10,000 tons a year, and
tl10se producing fine or :lavor cocoa were exempt from the export
~uota.
Despite t~e adjustments unde~taken in August 1974, to
~ove tl1e price ~an~e to 29.5 and 38.5 cents per pound a::d to
red~ce t:J.e export ~uotas by a~out 87,000 tons, the Agreement
never ~new full appl~cation.
Prices were ~vell above the range.
~he average :Jew York spot prices of cocoa were 98.13 a~d 74.32
cents per pound fer the years 1974 and 1975, respectively.
In 1975, a new ~c~ was negotiated under the same scheme
with a modified price range.
The new range was 39 to 53 cents
pe~ pound . . This Agreement did not l1ave more success than the
first one and in the summer 1979 a new renegotiation could not
be reached.
Another failure followed in March 1980.
The dis-
agreement was basically upon the floor price of 120 cents per
pound required by producers.
Finally, arneeting in the firs~
week of June 1980 is planned to dissolve the cocoa agreement.
Producers will have to set their stabiliiing price witho~t con-
suIting the consumers.
Causes of Failures
It is a fair question to ask that if the Agreement aims
to give stability to tl1e industry,
i.e., avoiding excessive

---

37
fluctuations, how does i t come about that in recent times
there have been dra~atic orice increases follo\\ved bv considerable
-
-
decreases in ~rices?
The average price for Accra was 74.82,
109.34, 202.55 and 160 cents Der pound in 1975, 1976, 1977, and
1978 respectively.
Charles z. Aki found that over the period 1964/65 to
1974/75, a consistent inverted market existed for cocoa [23].
In other words, the futures price was consistently below the
cash price; this can be related to the speculation argument.
I~ t~ese conditions, a buffer stock could ~ardly be acquired.
~~e form of ~~e IC~ ~as some negative aspects.
To be
e~ =ecti ~.re in increas i.nS e~{pcr"": incorne, a ccmrrloc.i ty as::-ee:ne~t
employi~g expert restriction must i~clude all important ac~ual
and potential expor~ers, u~derstocd that all of these producers
respect the restrictions
[34].
At the national level, a major problem caused by export
restrictions is that of adjusting output in the short-run down
to the level of the export quota in the case of perennial crops
such as cocoa.
Production depends strongly on weather conditions,
over which the government has no influenc~.
More importantly,
when cocoa accounts for a large percentage in export earnings,
production control policy looks rather controversial.
The
price to the producer (farmer)
coupled with some other problems
such as temporary labor seem to be important factors in the
actual production level which is generally below the forecast.
A word concerning the stabilization policies at the national
level should be included in this section.
Marketing Boards and

---

38
Caisses de Stabilisation ~olicies do not always increase ~~e
fariller's revenue;
but t~ey surely reduce t~e uncertainty about
the revenue.
This is an incentive for new plantations.
In the
long run, these new invest~ents will result in increased and
decreased prlces.
A Buffer Stock scheree has also some disadvantages.
It
involves two tv~es of costs.
-
First is the cost of actual
~
storage.
Cocoa is a sensitive illaterial re~uiri~g careful temper-
at~=e aLc ~oisture cc~trol curing storage.
Si~ce produci~g
i~ unfavourable regions for storage, and consumi~g
c8u~tri2S a~e i~ ~avcura~le ar2as,
s~cr~ge is usual:y i~ the
cons~~iLg c8unt~ies.
Secondly,
f~nds ~esessary to establish
the buffer depend on t~e ?rice e:asticities of demand and
supply, on the size of the expected shifts in the demand a~d
supply schedules,
and on the degree of price stability sought.
One U.S.
cent per pound exported was charged for the fund rais-
ing under the Agreement.

---

CHAPTER III
DEVE~OP~~T OF TEE MODEL
The purpose of t~is chapter is to develop an economic
and statistical model to represent the international market
for cocoa.
T~e ~odel Nill serve as a ~asis for estination
and will ?rovide esti~ates of t~e st=uctural ?arameters that
would be useful for considerin; tte ccnseS~e~ces of alternative
courses of action.
Any economic ~odel needs to ~e Guilt on ~~e foundation
of t~ree basic sources:
an economic theory,
some statistical
tools and previous st~dies to limit t~e scope of the study.
Formulation of an economic model, using t~e existing knowledge
of economic principles and empirical knowledge of the cocoa
economy will be undertaken; then, development of the economic
model into a statistical model will permit estimation of the'
relevant parameters.
Knowledge of economic theory and the sector under st~dy
provides tools for determining the kind of relations to be used
to make up the model,
the variables and their classification
to be included in each relation,
and the expected sign and/or
the magnitude of some of the partial derivatives.
Assumptions
need to be established also.
39

---

40
T~e economic ~odel will set a cer~ain number of sixulta-
neous equctions to be estimcted.
It is ~equired that the
n~ber of variables whose values are to ~e explained must be
equal to the number of independent relationships in a model:
if not,
estimction will be impossible.
The Statistical ~odel
The statistical model is of general =orm:
3Y + ~X = u
where:
Y is a G x 1 vector 0= var~ables to ~e explai~ed,
also ter~ed e~doge~ous var~a61es;
x ~s a X x : vec~or of expla~ctory variab:es
(exogenous and lagged endo;eno~s var~ables,
...,
. . ,
...
termed
'
prece~ermlnec varlaD~es;
U is a G x 1 vector 0= stochast~c disturjances;
B is a G x G ~atrix of structural coefficients
of the current endogenous variable;
r is a G x K matrix of structural coefficients
of the predetermined variables.
The ith equation of a statistical mqdel mcy be written as:
yi = YiSi + Xiyi + ui
i
= 1, .... ,G
where:
Yi is an n x 1 vector of s~~ple observations on
the dependent variable in the ith equation,
Yi is an n x
(g - 1)
matrix of observations on
the other endogenous variables in the equation,
Xi is an n x k matrix of observations on the
predetermined variables i~_ tte
~.
equc~lon,

---

41
3i lS an
(g - 1)
x 1 vector of coefficients,
yi is an k x 1 vector of coefficients,
and
ui is a G x 1 vector of disturbances.
Identification
The identification problem is very important in model
estimation.
There are two conditions which must be fulfilled
for an equation to be identified
[10,
352]:
i)
The order condition stating that for a~ equation to
be identified the total number of variables excluded from i t
but included in other equations must be a~ least as great as
the number of equations of t~e sys~e~ less one.
G is t~e
number of equat~or.s in the system,
K the number of variables
in the model and M the n~~ber of variables,
e~dogenous and
exogenous,
included in a particular equa~icr., ~he order co~di-
tion can be s~~arlzed as:
(K - M)
>
G - 1
[excluded >
1
f
1
variables]- [~ota
number 0
equations -
]
ii)
The rank co~dition is a necessary and sufficient con-
dition for identification.
It states that there must be at
least one non-vanishing determinant of order
(G -
1)
equations
(other than the equation under examination)
using only those
I
variables that have been excluded from the equation under
examination.
The International ~occa Economy
The Economic Model
Adarns [1,
p.15] argued in a world
increasing international
interdependence,
national economic pol~cy cannot disregard

---

42
international economic relationships.
I~ports and exports are
important elements,
the dominant factors
i~ some countries,
in deter~ining the domestic economic outlook.
World supply of cocoa beans is derived from cocoa pro-
ductions of the many cocoa producing countries.
Because
production functions are difficult to define for perennial
crops,
the study considers the exports from the producing
countries as the supply of cocoa.
~ost of the cocoa produced
is exported to the consuming areas.
i~plies tha~ exports
and productions w~ll ~e strongly related; therefore,
production
should be included in equations representing the expcr~s, as
an exogenous variajle.
~ay be broken dow~ into the exports of the four produc:~g
,-
- _.
~locs:
.
....,.=rJ..ca, .::~.I7,e r i ::a , Asia and Oceania and West l.::cJ..es .
Unless local cons~~ption increases considerably,
a 20untrv
will export more
(less)
if production increases
(decreases).
A positive relation is expected between the two variables.
Apart from the production,
the international price of cocoa is
an important variable to be considered.
Exports are theorized
to be positively related to the export pr.ice.
A time trend
variable may be included in the exports equation.
World demand for cocoa is derived from the import demands
of the countries consuming cocoa.
The U.S.
is the largest
importing country on a single country basis but the BC is the
largest cons~~ing bloc.
Statistics indicate that the USSR is
a potential large consumer.
The demand for cocoa is therefore
broken down into four jlocs:
the U.S.,
the ~C, the USSR and

---

43
the rest of the world.
Although the concer~ is to derive
import demand,
agg=egate cons~~ption patterns also wi~l be
examined and t~erefore included in the model for the U.S.,
the
EC and t~e uSSR.
Consumption is hypothesized to be a
function
of the income level,
the retail price of cocoa products,
the
prices of other substitutes and ccmplements of cocoa products.
A priori expectations are that consumption will be positively
related to the price of substit~tes and the income
(unless
cocoa is an inferior good),
and nega~ively related to ~ne
prices of cocoa and of its comple~ents.
Past studies suggest
that in the uSSR co~sumption function,
t~e previous consump-
tion is 0= =eleva~t i~porta~ce.
tion,
the more
(less)
impcr~s will be required.
Import price
of cocoa is expected to be negatively related to the import
level.
The level of the cocoa stock of the previous year will
als0 affect. level of imports.
Data Considerations
Secondary data are usually available for analysis.-
Gill
and Duffus Cocoa Statistics is the major source.
This is
supplemented by issues of the United ~ations Statistical
Yearbooks and the Food and Agriculture Organization's Cocoa
Statistics and Commodity Review and Outlook.
A listing of the
data employed is contained in the appendix.
Exports and imports
are net exports and net imports as reported by Gill and Duffus.
Consumption is defined as the appa=en~ disappearance of all

---

44
cocoa products
(manufacturec domestically or i~ported) .
Data on the retail prices of some forms of cocoa products
are grossly inadequate for mos~ countries.
The ave~age a~nual
cocoa bean import price can ~e used to reflect prices in con-
sumption and imports; but,
because of the time lag of about a
year
(between 9 a~d 15 months)
that exists between import
price fluctuations and retail price fluctuations,
consumption
can be set as a ~u~ction of t~e import price lagged one year.
For the D.S. a simple ave~age of ~he G~anaian and catian
cocoa spot p~ices i~ ~ew ~ork in dollars per h~~d~ec ~~:~gra~s
are usec.
?er t~e SC,
the Lencon spet price see~s 2cc~rate.
~nit value of cccoa i~ports i3 ~sec :~r t~e css~.
:~ose
prices are deflated by ~~e CcnSQ~er ?rice Index (e?: 8ase
year = 1970) for each ceuntry.
The ~oncon price deflated by
the Financial Times Index ~verace* can be usec for expert
price.
The average annual wholesale price of refined sugar in
~ew York can be used for the U.S. and similar wholesale price
for refined sugar in Ge~any can approximate the EC sugar price.
The buying power in the U.S. and the EC can be approximated
by the average real personal disposable income and the national
income respectively.
The closest approximation to personal
disposable income suggested by Blandford for the USSR is the
New Material Product
(NMP).
*The Financial Time Index of Sensitive Commodity prices
is a geometric average of 12 primary commodities selected
from the U.S. and uK markets.
Base:
1st July, 1952 = 100.

---

An approximation of the available cocoa stocks of the
previous year is obtained by taking the difference Qet~een
the net imports and the total grindinqs of the previous year.
The variables used i:: the study are termed as follows:
AFREX = African net exports
N1EX = American net exports
ASIAEX = Asian and Ocean net exports
WI~EX = \\iest Indies net exports
~FP = London spot price ceflated 8Y t~e Financial
Time Index
\\.;SCCN =
:;S ::·1 =
::et
JP~ = ~ew York scc~ c~:ce of cocoa ~eflated by t~e
71.3.
C?:
JSUGF~ = Wholesale ~rice of refined sugar deflated by
the U.S. CPl
USINC = U.S. personal disposable income
DPRICE = Mew York spot price of cocoa deflated by the
Wholesale Price Index
ECCON = EC consumption
ECI~ = EC net imports
DLON = London spot price of cocoa deflated by the
EC CPI
DSUGEC = Wholesale price of refined sugar in Germany
deflated by EC CPI
DNATINC = EC national income deflated by EC CPI
USSRCON = USSR consumption
USSRIr-l = USSR net i;-:'lports
DPTJSSR = Unit value of cocoa deflated by USSR CPI

---

46
DNMP = De::lated Net r-laterial ?=oduct of the USSrt
OTHERS
Imports of count=ies other than t:,e U. S. , +-"
=
_r:e
-.;",..,
.... '-
and the USSR
USSTOCX = Cocoa stocks in ,.. ,.-
U • .::J.
ECSTOCK = Cocoa stocks in EC
USSRSTOCK = Cocoa stocks i~ C"SSR
STOCK = Cocoa stocks ir. otner countries
.~R = African production
~~ = _~erican productlOr.
ASIA = Asian ar.d Ocear.i=r. proc~ction
T~e Stat~3~ica' ~cdel
~
"
-
+-0
,
.::.aC:1
:tUr.C_10r.2..J..
relaticr:s:-::'p
ce
ir. the variables ~o= c2~putaticr.=1
,
" ' l '
"
S:':"'Jr:~lCl-:Y·
to the stcchastic c~aracteriz=~lor. of tne systen of e~uaticr.s,
certain ass~~ptior.s are ~ade about ~he disturbance terms.
It is
assumed that the disturbance variaoles:
i)
are normally distributed7
ii)
have an expected value of zero;
iii)
are homoscedastic over time;
iv)
are not serially correlated over time;
v)
are independent of the predete~ined variable.
The model comprises 11 behavior equations:
AFREX = f(AFR, DFP, ~, u)
AMEX = f(~~, DFP, T, u)
ASIAEX = f(ASIA, DPP, T, u)
WINEX = f(WI~,
DFP,
T,
u)

---

47
USC001 = f WPR_l' DSUGAR...f~USINC, u)
USD1 = f(USCON, DPRICE, USSTOC:< -1 ' u)
ECCC~J = f(DLON_l'
DStIGEC-l, DNATINC,
u)
ECI~1 = f(DLON,
ECSTOC:<_l'
ECCON, u)
USSRCON = f(DPUSSR_l' DNMP, USSRCON_l' u)
USSRIM = f(DPUSSR, USSRSTOCK_ l , USSRCON, u)
OTHERS = f(DLON, STOCK_ l , u)
where u is the disturbance variable.
With respect to the or~er condition,
all of the 11 equa-
tions are
...
.. ..
overi~entified.
,
':-2.:: .."<
cc~c:...:. 't..J.on,
an a priori exami.:1atior- of t:-:e s-::'r'J.c~ural
ra.:1k =or.ditions are not violated.
The ~odel is a set of si~ulta.:1eous equa~~or. Nhi=h ~ea~s
t~at endogenous variables a~pear a~or.g explanatory var~ables
in some equations.
.:~:..ITIOr..g al tern.ati -le ;net hods a',"ailaole for
estimati.:1g simultaneous equations overider.tified,
two-stage
least squares method is recommended
[10,
384].
Econometrical
development of this method will not be discussed but readers
interested may refer to H. Theil's work.
(32)

---

CHAPTER IV
E~~IRICAL RESULTS
Using the data available,
t~o-sta~e least squares
method was applied to the ~odel defined in the previous
chapter.
The period 1952-1975 was chosen.
This chapter
is a discussion of the results obtai~ed.
The relevant
statistics to consider are the standard error of the esti-
mates that are reported in parentheses below the respective
that is tte
sions.
~~e
...1;
·nJ.·~'ner
•
"::ll
-
the
•
n~
. ; ' . . ,
~·.~.e
_
g~e~~er
_ _ _ ""'-
_
_,~- ~~e ~.
_ ercentage
of
varia-cion of the dependent variable explained by t~e regres-
sors.
A rule of th~~b stipulates that if
star-dard
error of an esti~ate is greater than half of the value of
the estimate,
it is accepted that the estimate is not
statistically significant at the 5 percent level.
Another
relevant statistic is the Durbin-Watson statistic
(DN).
It indicates the possibility of serial correlation between
the error terms.
A DW value too far from 2 is a sign of
uncertainty or existence of serial correlation.
General Results
AFREX = 239.721 + 0.707 AFR - 35.752 DFP + 0.660 T
(121.24)
(0.105)
(12.13)
(3.55)
R2 = .96
DW = 1.84
48

---

49
.~1EX = 120.264 + 0.534 k~
1.290 OF?
,
r
-
-
,.,.,
...... 0:>:>
J..
(32.00)
(0.088)
(3.881)
(0.687)
~2 = .76
:)W = 1. 60
AS1AEX = -7.587 + 0.809AS1A + 0.042 OFP + 0.137 T
(15.68)
(0.145)
( . 50)
(.301)
R2 = .97
DW = 2.35
W1NEX = -0.567 + 0.513 OFP
1. 047 ~'iI)1 + 0.116 T
(12.34)
(0.129)
(0.808)
(0.115)
R2 = .45
DW = 1. 77
ECCON = 186.128 - 19.739 DLON_ l + 32.070 OSDGECl+
(91.67)
(3.838)
(28.684)
0.012 DNATINC
(0.003)~2 = .92
DW = 1.8]
~C1~ = 36.71? + 0.396 ~co~ - 0.912 D:CN + 0.311 ~CS~CCX 1
(76.82)
(0.1.32)
(3.39)
(0.296)
"
~~ = .38
;)W = 1.90
USC8~ = 2 43 . 199 -
62. 324 ;) P ?., -
,
.,
""'I
"" Q
,-
~_L..~,-,~
( ")4
_ . . 3""I J.
('
LJ.. -
:> • -
.,j ~8'
0
l
0.027 m;S:)TC
(0.003) "
2'" = .38
~SIM = 295.132 + 0.140 USCCN
0.448 OPRICE ~
(60.08)
(0.1361
lO.1301
0.200 USSTOCX_ 1
(0.2151
R2 = .63
DW = 1.86
USSRCON = -2.038 + 0.727 USSRCON_
-
14.420 DPUSSR_l +
l
l8.8871
LO.1621
(7.261
0.0175 DNMP
(0.008)
R2 = .98
USSR1M = 13.367 + 0.903 USSRCON
14.809 DPUSSR
(7 • 411
lO. 0481
l11. 67)_
0.357 USSRSTOCK_ 1
lO.195~
R
= .95
DW = 2.27
OTHERS = 124.181 - 20.246 DLON
0.572 STOCK_ 1
(22.49)
U.4011
LO. 06)
R2 = .91
DW = 1.10

---

50
I~terDretation of Results
Except for tte time trend variable,
standard er~ors of
the estimates of tne exports function from Africa indicate
statistical significance at 5 percent level.
There is an
incompatibility withapriori re2soning for the sign of the
export price estimate.
A plausible explanation may be the
inadequacy of the use of the Financial Ti~es Index as price
deflator; another reason may be the decli~e i~ the real
value of cocoa while expor~s are ~nc=easing because of p=o-
duction increases.
A price elasticity of supply at mean
values C2D be calc~lated 25 follows from the defi~ition of
tte elasticity:
(~Q/Q)*
?
Es =
:
(6?/P)**
The elasticity can be defined as ~he percen~2ge ch2r.ge
of the quantity exposed in ~esponse to 1 percent ch2r.ge in
the price.
using mean values,
Es becomes:
Es = tQ
p
~p
Q
The ratio tiQ/6P is nothing but the estimate found in the
export equation with respect to price.
The price elasticity
of exports calculated is -0.15.
Although the sign is unex-
pected,
the magnitude indicates price inelasticity of supply.
Any price increase of 1 percent will decre2se the supply by
* 6Q/Q:
rate of change of the quantity cons~ued
** up/p:
rate of change of price

---

51
.15percent.*
Limited ways of increasing or decreasing supplies
of perennial in the short-run can explain the price inelasti-
city.
As hypothesized,
production is positively related to
exports.
The high R2 indicates that 96 percent of the varia-
tions in exports from Af=ica are explained by the variables
in the equation.
The ew statistics does not indicate the
existence of serial correlation between dist~=bance terms.
The American export function shows characteristics similar
to the African export function:
unexpected r.egative sign to
~he price coefficlent: ~oreover, the coefficient is no~
s~atistically significant at t~e ~ percen~ level: prod~ction
~s pcsitively related to e:{pcrts.
Tte:W statistics ~~dic2te
no serial correlation but the R2 is lower
Lonly 76 percent
of the variations In ~~erican expor~ are explained by the price,
the production and the ti~e trendL.
Because of the relatively
small shares of the Asian and West Indies markets,
functions
representing their exports do not show significant esti~ates
for the price of cocoa.
The high R2 of the Asian exports
function is explained by the strong relation between exports
and production.
The relevant statistics of the consumption functions of
the EC,
the U.S.
and the USSR are satisfactory in general,
with low standard errors and acceptable R2 .
The values of
the Durban-Watson statistic for the EC and U.S. equations
do not imply rejection of the null hypothesis of zero auto
*Elastics effects are measured,
ceteris Daribus,
i.e. no
change in the other variables is considered.

---

52
correlation of residuals at the 5 percent confidence level.
DW statistic for the USSR cons~~ption function is not valid
because of the presence of lagged dependent variable a~ong
the explanatory variables.
In Table 4, the elasticities derived frc~ the estimates
equations are presented.
The elasticities have been com-
puted at illean values of price,
income and consumption.
T.\\BLE 4
ESTD1ATES OF ED.STICITIES OF CONSm'!PT:ON
OF COCOA I:'1 THREE ~1.AJOR ~'1A...~.KETS
Cross Price
~1
.
,'.ar Ke-c
Own Price
Income
(Suga.:- )
wS
-0.18
0.48
-C.lO
=:C
-0.20
0.32
0.13
USSR
-0.12
0.48
(1 \\
~J
Computed from consumption equations.
(1) Sugar price variable was not included in t~e equation.
The table indicates that the cocoa consumption elasti-
cities with respect to income and price are less than unity
for the three blocs.
The inelasticity of cocoa consumption
with respect to its price and the incomes of consuming countries
is thus verified.
If cocoa price increases by 1 percent, the
US consumption decreases by .18 percent, the EC cons~~ption
by .20 percent and the USSR consumption by .12 percent.
Con-
sumption in the U.S. will increase by .48 percent if income

---

I
r
53
increases by 1 percent.
Although cocoa products have uses
in cosmetics and foods,
those uses are not essential and
are few in number.
Relatively to the consumers'
incomes,
the expenditure on cocoa product is very low.
This explains
why conSlliuers seem to be insensitive to cocoa price changes.
Another interesting feature of the elasticities ,table
is the positive sign of the cross price elasticity with re-
spect to sugar in the 2C.
Because of the i~portance of
sugar in chocolate prcd~cts (about SO percent),
sugar lS
often considered as a substitute for chocolate products.
:he ~.s. i~ports ~ere postulated to be a f~nctior. of
~otal ~.s. cons~~ption, t~e s~ot price of cocoa; and ~he
level of stock avallable at the end of the previous year.
The computation showed a low R2
(.63),
indicating tha~ some
explanatory variables have been omitted.
m'
.
~ne
prlce
elasticity of imports calculated at mean values
(-.33)
indi-
cates that 'imports are also inelastic.
The stock available
at the end of the preVious year is positively related to
the imports,
which is inconsistent with a ~riori reasoning.
The EC imports demand will increase by about 90 thousand metri~
tons if the total consumption increases by 100 thousand metric
tons.
The USSR import demand will decrease by about 36 thousand
metric tons if the stock available at the'end of the pre-
vious year increases by 100 thousand metric tons.
The imports of the other countries will decrease by
about 57 thousand metric tons if stocks increase by 100 thou-
sand metric tons.
Imports price elasticity calculated at ~ean
values is found to be -.34.

---

34
Price Determination
One interesting feature of some of the equations
in the model is the iwportance of the consumption and the
level of stocks available at the end of the previous year.
In fact,
they are two major components to consider in corn-
rnodity price determination.
A stock-flow adjustment can
represent the relationship between the price of cocoa,
avail-
able stocks and the consumption of cocoa.
T~e stock flow
adjustment reflects the pressure of consumption on available
inventories and is measured by the ratio stock-consQ~ption.
ASSQ~~~g ~~a~ ~he relationship between ~~e price of cccca
2.::alyzec.:
+ a RA~IO + a~T + u
1
~
where:
PRICE = spo~ price of cocoa in New York
in U.S.
cents/kg
(constant)
RATIO = ratio of importing countries stocks
of cocoa beans available at the end
of the previous year and the world
grindings of cocoa for the current year
T = time Trend, and
u = a disturbance term.
Ordinary least-squares was used to estimate the equation
over the period 1952-1975 and the result obtained is:
PRICE = 549.68 - 805.56 RATIO - 7.50 T
(10~. 49) ~174. 33).
(1.825)
R
= .5~
Dw = 1.62
Although the result indicates a low R2 ,
the standard
error in parentheses shows that the esti~ates are significant
at the 5 percent confidence level.
Cocoa price is negatively

---

=esponsive to the level of stocks and positively respcnsive
to the level of demand for c~rrent usa~e (grindings).
The
elasticities at mean values are -0.69 and
.69 respectively.
It appears that the demand for inventories has a deflated
price elasticity of -1/.69 or -1.45 which is greater than
unity and indicates that the GeT.and for inventories is price
elastic.
The negative sign of the time trend coefficient is
a proof that cocoa real price has been decreasing over the
period of st:.ldy.
St~pulatec i~ a ~ette= fcr~ ana with ~ore expla~a~ory
va=iab~es, ~~e stcc~ flow adjust~e~~ relat~cnsh~p can be
T~e failure 0= t~e =~ternatio~al Cocoa ~greement ~~ due
to a disa;reement on tr.e 9r~ce r~n~e to be adop~ed.
Mcnthlv Price Move~ents
Weymar
[22J
has developed a theoretical equation to
study the monthly price changes.
Inventories and cons~~ption
were important variables in the equation derivation.
After
setting a cocoa short term supply of storage function,
Weymar
defined the current price level as a function of long run
equilibrium price expectations and the expected future behav-
ior of the inventory coverage.
The final specified equation
structure to be used for estimaticn was as follows:

---

56
where:
Pt = Postwar average real spot price of .:\\ccra
cocoa in New York
P... = Monthly average real spot price of cocoa
'-
in New York
h
=
t
Horizon interval
Zt = S~Th~ary figures of monthly coefficients for
inventory ratio expectations
y*ht = Expected inventory ratio at the horizon
t
time,
and
* (~Pt~.
h ·
t
t '
1.1..·
l '
:::al
- - I lS t
e pr:.ce expec a lon :nu I..lp ler
P +-
J exposed as an exponential ::'lnction of
~
the ~ast cocoa price trend.
~he present study does not aim to ~se t~e equat~on de-
fined by ~"iey,,:ar for the cocca prlce :nechanis;:l~ nevertheless,
the expec~ed inventory ra~io~ ::'lncticn for each :nonth of the
crop year can be applied to the ~ew York ~arket to deter~ine
the seasonal inventory behavior.
The equation suggested oy
Heyrnar was as follows:
lny*h = Ch + dhlnY
+ ehlny~ht
t
where:
y*h = Expected inventory ratio at each month
over an horizon interval
Yt
= Current inventory ratio
y*ht = Ratio expected at the horizon time.
Since the cocoa crop year ends in September,
this month
can be considered as the horizon time.
Weymar suggested that
actual values may be used in the analysis,
instead of the
expected values.
As an example,
if January is the current
month and September the horizon time,
regressions of the interim
*The inventory ratio is defined as the ratio of current
inventory at the end of the month and the rate of consumption
over the previous twelve ~onths.

---

37
behavior of the ratio on the boundary ratios
(i.e.,
January
and September)
over the period January-September are the forns:
h = 1 in February,
h = 2 in March,
., h = 7 in August.
January coefficients for inventory ratio expectations are
obtained by s~~ming the ch's, the ?h'S and the eh's found in
the seven equations estimation.
Data on the U.S. monthly grindings of cocoa beans a~d
the visible stocks 0= cocoa beans ir. ~ew York and Philadelphia
were used to dete=~i~e ~onthly coef=icie~ts for inver.tory
ratio expectations over the period October 1964-September 1976.
7he relevance of the seascnal inventory behavior study is
that it allows estimation of the expected price changes from
some present to the horizon time
(September)
as follows:
f!:t-l
~t-l \\
(ht-l
\\
hJ
blht + b 2 ~=o Ch +\\~=o d h ) InYt + It=o eh) InY* ~
From the results given in Table 5,
the equation above
can be rewritten for January.
In(P*7)= b
(7}
+ b
[-1.033 + 4.975 InY
l
2
t
+ 2.364 InYt7]
Pt
'
I
where:
Pt = spot price
(in January)
7
p*
= expected price at horizon point
(September)
t
Yt = current inventory ratio (January)
y*7 = expected inventory ratio at horizon
(September)

---

58
T.~BLE 5
~ONTHLY COEFFICIENTS FOR I~vENTORY
~;TIO
EXPECTATIO~S
OF NEW YORK ACCRA SPOT PRICE,
OCTOBER 1964 - SEPT~1BER 1976
Month
September
-1.066
5.4436
6.2312
October
-1.8335
5.3067
..L 8067
"
.
.lovemoer
-2.6278
5.6675
2.9655
JeceIT'.ber
-2.8496
5.4436
2.2771
Jar:uary
-2..0323
4.9748
2.3639
February
-1.0310
4.1390
2.2722
~1arch
-1. 5434
3.5544
1. 6723
April
-0.8245
3.1400
1. 3848
!'-lay
-1.1240
2.2800
1.5687
June
-0.1666
1.7140
1.1536
July
0.0671
1.4988
0.5173
August
0.0000
1.0000
0.0000

---

CHAPTER V
ALTERNATIVE S~ABILIZATICN
POLICIES,
S~~~Y .~ID CONCLUSION
Alternative Price and Earninas Stabilization Policies
The previous chapter has shown,
among other t~ings,
that world cocoa i~port deIT.and is price inelastic and snl=ts
frequently;
s~ch a de~and,
when juxtaposed on a gi7e~ 3~pply
schedule will create =requently changi~g prices.
~ore ~~-
portantly,
the ~ore price inelas~ic the supply is, the Nider
1 - ·
.
~o=
c
prlce c~a~;es be.
~he price lnelasticity 0= ce~and
suggests that since high prices will result in expanded earn-
ings despite decreases in quantity de~ar.ded, naturally,
cocoa
producers should ai~ for the highest possible world prices
for their commodity.
High cocoa prices can be achieved in an international
market,
by
(i}
expanding world demand and/or
(ii)
reducing
world supply.
With regard to
(i),
an examination of the vari-
abIes in the equations for cocoa imports would suggest that
producers' manipulation to achieve the objective of expanding
world demand can be mostly on the consumption.
Better adver-
tising in the declining markets and search for new markets in
the Middle East and Eastern Europe are potential actions.
It
has been argued that cocoa products are not essential and will
not have much success in low-income countries.
;iith regard to

---

60
(ii),
supply reduction has been considered in the past and
implemented through the various for~s of alliances~ but no
real restrictions have been imposed on production.
Moreover,
when exports restrictions schemes existed,
some ~ajor pro-
ducers broke the co~~ittment.
The price movements have been controlled through stabiliza-
tion policies without success.
F=equent price movements are
ha=mful to the produci~g countries in the way that they bring
instability into the produci~g countries'
econo~ies dependinq
heavily on cocoa exports fer thei= means of financinq develop-
ment.
Econe~ic instaDil~ty is undesirable because it causes
variation in aqgregate ccnsu~pticn, and it chanqes the distri-
bution of i~come a~d wea:t~.
:ne ~oal of t~e produci~~ ccu~-
tries should therefore be to da~pen the price fluctuations.
Price fluctuations can be dampened i~ three ways:
(i)
make the world cocoa export supply function less price inelastic
so that demand changes imposed on i t will result in small vari-
ation in price,
(ii)
impose a price stabilization scheme~ this
calls for the renogotiation of the failed aqreement under the
basis of better studies of the price movements pattern,
(iii)
reduce demand movements.
With regard to the first method,
export supply could be
made less inelastic in two ways.
First,
stocks held in pro-
ducing countries could play a greater role than at present.
Larger investments should be undertaken to create storage
facilities in producing areas.
That way,
stocks can be more
easily increased and thus decrease exports when needed.

---

61
Secondly,
there should be a Buffer Stock for the whole market.
This scheme goes for the second method,
also.
The third method will be hard to implement as long as
cocoa demand emanates principally from the Western,
free-
enterprise economies; cyclical changes in the economy and
fluctuations in the level of ma~u£acturing of chocolate indus-
tries will assure a frequently shifting demand schedule.
S~~T.arV and Conclusion
~he decline of the traditional u.S.
and Western ~uropean
~a=kets for cocoa and the expans~on ~n production in some pro-
ducing coun~ries have ~ade it i~;ortar.t that cajor producers
exanine the market relationshi;s for cocoa.
This study was
ah atte~pt to desc=ibe the cocoa ~a=ket and ceter~i~e some 0=
the interesting relationships cetween variables i~volved in
the cocoa market.
To fulfill these objectives,
a survey of the cocoa economy
as described in previous studies was undertaken; the features
of this survey include
Cil ~he decline of the traditional cocoa
market,
Cii)
the rise of the Ivory Coast production and the
decline in the Nigerian and Ghanaian shares of the market,
(iii)
cocoa,
a source of currency through Marketing Boards
and Caisses de Stabilisation activities,
Uv}
the failure
of all attempts to reach a stable cocoa agreement.
The conceptual fra~ework provided by economic theory and
the quantitative tools of statistics have been used to build a
model capable of representing the world cocoa market.
Equations

---

62
representing cocoa supply from Africa and ~~erica as well as
those representing cocoa demand i~ the United States,
t~e
European Community and the USSR,
were incorporated in the
~odel.
The illethod of Two Stage least-squares provided good
estimates of consumption but poor estimates of imports.
The study has found that world cocoa demand is price
inelastic.
Although inconsistent signs exist,
supply was
also found inelastic.
Importance of cons~~ption and stocks
of cocoa beans has been revealed.
~hese two variables were
co~bined to find a ground for price determination.
The stock
flow adJustment re:atlonshi? proviied an interesting C2se.
We~~lar's ~ore ~heoretlcal model needed ~ore work to achieve
a co~plete price dete~ination, but opened fields for further
stUdies.
The illodel has provided a quantitative definition of the
underlying relationships for cocoa supply and demand in the
world.
More meaningful variables,
appropriate functional forms
and the breaking down of the supply and demand into more coun-
tries will certainly improve the study.
Appropriate production
functions taking into account the years of new plantings and
regeneration will also improve the model.
Finally,
considera-
tion of short-run and long-run supply and demand relationships
will ring the problem better.
But, whatever the shortcomings
of the model,
i t has provided the author knowledge of the hard
work involved in research.

---

63

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---

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---

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---

73
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Caroo~dale, 197:.
2 9 . ' "I.'7ory Coast Centinc.es to Expand Cecsa ?::oc.'.1ction,"
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Aaricult'.1re Circular.
~SDA FeE 1-8C, January 1980.
3 C•
~2.=tten,
La:.J.=en,
11 ~~e
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(19i8):
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1
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74
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, Production Year~ook, ~ome:
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- - - - -
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VITA SHEET
Graduate School
Southern Illinois University
[
I
Name:
Karna Berte
I,
Date of Birth:
January 13,
1953
Local .:;ddress:
312 S.
Rays,
No. 17, Carbondale,
:i:L 62901
Home Address:
cia Pessique 3erte Lt des Douanes
BP V25
Abidjan
(Ivory Coast)
Colleces a~~ ~~ive=si~ies ~tte~ded
universite C'
Abidjan
1973-1'975
DU::::S Sciences
Scale ~ationa1e Superieure
Aqronomique d'
Abidjan
1975-1977
jJAG .:;'q=icultu=e
Southern Illinois Unive=sity
1978-1980
~.s. Ag=icultural
Economics
Thesis Title:
Economic Analysis of the \\~orld Cocoa Market
Advisor:
Dr. WaIter J.
Wills
75

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