Can Nigeria sustain increased cocoa supplies?

Cocoa prices have experienced a moderate decline due to an increase in cocoa supplies from Nigeria, leading to long liquidation in cocoa futures. Tedd George, the Chief Narrative Officer at Kleos Advisory, recently appeared on CNBC Africa to discuss the latest developments in Nigeria's cocoa value chain. One of the key topics of discussion was the Africa Cocoa Exchange, a project sponsored by the International Cocoa Organization with the aim of bringing pricing power back to Africa. Currently, London and New York dictate cocoa prices, which are far removed from the actual farm gate where farmers set their prices. In Nigeria, the market is completely liberalized, with no fixed price in place. The Africa Cocoa Exchange plans to establish exchanges in major cocoa-producing countries like Cote d'Ivoire, Ghana, Nigeria, and Cameroon, connecting them to create a regional exchange. This initiative could lead to a regional price for West Africa cocoa, empowering farmers, cooperatives, and processors to finance their stocks through the exchange and gain more control over the cocoa market in their countries. With Africa accounting for 70-75% of world cocoa production, the move to localize pricing is seen as a significant step towards fairer pricing mechanisms. The project involves engaging with various stakeholders, including regulators. In Nigeria, where the cocoa market is fragmented across multiple ministries and agencies, stakeholder engagement has been extensive, with discussions held with banks, traceability and certification bodies, processors, and traders. Positive responses have been received, with potential delivery terminals for the cocoa exchange being identified, such as warehouses near the airport owned by Starlink. The timeline for the project indicates that pilot programs could be launched before the middle of next year, with Nigeria positioned to lead the way in implementing the initiative. Despite Nigeria's lower cocoa production compared to Cote d'Ivoire and Ghana, it plays a significant role as a supplementary cocoa source for larger producers. However, there is a pressing need for more investment in new trees and the revitalization of the sector to attract younger farmers given the aging demographic of current cocoa producers in Nigeria. The success of the Africa Cocoa Exchange could have far-reaching implications for the international cocoa market. By pricing cocoa closer to the source in Africa, the accuracy and efficiency of pricing mechanisms are expected to improve, potentially influencing London and New York markets to align their prices with those of West Africa. This shift could create opportunities for arbitrage and lead to a more transparent and responsive cocoa pricing system. Looking ahead, the outlook for cocoa production in major producers like Ghana and Cote d'Ivoire remains uncertain due to various challenges such as diseases affecting cocoa pods, land viability issues, and erratic weather conditions impacting crop yields. While some traders have tight supply chains, others are facing operational challenges, hinting at a potential supply shortage in the coming seasons. As a result, cocoa prices are likely to remain high in the foreseeable future, urging producers like Nigeria and Cameroon to ramp up production to offset the shortfall from other major producers. The changing landscape of the cocoa market calls for adaptation to new challenges, emphasizing the need for sustainable cocoa production practices and resilient supply chains to navigate the volatile market conditions. With concerted efforts and strategic interventions, the Africa Cocoa Exchange could usher in a new era of stability and empowerment for cocoa stakeholders in the region, ensuring a more prosperous future for the cocoa industry in Africa.