Summary
Given the role the London Cocoa Future market plays in setting the benchmark for cocoa prices, through its impact on the value of the £ a ‘No-Deal’ Brexit could have a significant impact on cocoa prices. With growing investment in local cocoa value added processing for the domestic market in countries such as Ghana, the application of the UK’s currently proposed post-Brexit unilateral MFN tariff schedule could create new market opportunities for the export of not fatted cocoa paste and cocoa butter to the UK market. However, given the existing ownership structure of value added cocoa processing activities, there may be a reluctance to plan for an expansion of local value added processing to serve the UK market since this would directly compete with similar facilities in the Netherlands and Belgium which are part of the same corporate family.
Analysts are suggesting a ‘No-Deal’ Brexit could adversely impact on the price of cocoa given the impact such an outcome would have on the value of the £ and the major role the London cocoa market plays in managing physical sales of cocoa (1).
It has been pointed out how following the Brexit referendum the £ dropped from $1.50 to $1.20 by the end of that year, with the cocoa future price falling from ‘over $3200 per ton in June 2016 to the low at $1769 per ton in June 2017’. It was argued that ‘while abundant supplies weighed on the price, the collapse of the value of the pound versus the dollar added to the selling’ (1).
Meanwhile Ghana’s confectionery company Niche whose parent company is ‘Ghana’s largest independent cocoa processor’ handling ‘60,000 metric tons annually’ has secured a ‘€8m loan from Dutch investment bank’ FMO to support ‘the addition of new lines for instant cocoa powder, ready-to-drink chocolate and chocolate-based spreads’ (2). Currently the company which was founded in 2011 by Niche Cocoa Industry Ltd has a product range which includes ‘natural and alkalized cocoa powder, natural and deodorized cocoa butter, and cocoa liquor’.
This needs to be seen in a context where the UK’s October 2019 proposed post-Brexit MFN tariff schedule would retain in place a 9.60% import duty on ‘not defatted cocoa paste’ and a 7.7% import duty on ‘Cocoa butter, fat and oil’. Currently around 60% of UK cocoa paste and over 50% of UK cocoa butter imports come from EU27 member states.
The imposition by the UK of standard MFN duties on imports of not defatted cocoa paste’ and ‘Cocoa butter, fat and oil’ from EU27 suppliers could potentially open up opportunities for Ghanaian and Ivorian cocoa companies to increase direct exports of cocoa paste and cocoa butter to the UK market.
Since 2007 there has been more than a 3 ½ fold increase in Ghanaian Not Fatted Cocoa Paste (180310) to the EU, with since 2015 a small trade into the UK emerging (2.7% of exports to the EU28). There has also been an almost 3 ½ fold increase in exports of Ghanaian cocoa butter to the EU28 market with the UK accounting for 5.2% of these exports in 2018 (down from 20.2% in 2007) There was a steady increase in Ghanaian cocoa butter exports to the UK between 2011 and 2016 with a subsequent 60% decline in direct exports to the UK from 2016 to 2018 (from 7,208 tonnes to 2,916 tonnes). This dip in direct exports to the UK was mirrored in the Not Fatted Cocoa Paste trade which fell 66% over the same period (from 5,514 tonnes to 1,845 tonnes).
The increase in Ivorian exports of Not Fatted Cocoa Paste to the EU has been less dramatic (+30%); though be it from a much higher base, but with no exports directly to the UK taking place. For cocoa butter exports to the EU28 market increased 58% since 2007, with a growing level of direct exports to the UK since 2014, with the UK market coming to account for over a 1/4 of total exports to the EU28 market in 2018.
Not Fatted Cocoa Paste (180310)
| 2007… | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
| Ghana | |||||||||
| – UK | 0 | 0 | 0 | 0 | 0 | 2,016 | 5,514 | 4,131, | 1,845 |
| – EU28 | 18,401 | 57,490 | 48,660, | 46,709 | 51,787 | 54,597 | 47,878 | 58,690 | 67,549 |
| Cote d’Ivoire | |||||||||
| – UK | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| – EU28 | 103,122 | 105,847 | 115,809 | 158,756 | 155,224 | 133,423 | 126,891 | 144,456 | 133,878 |
Cocoa Butter (1804)
| 2007… | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||
| Ghana | ||||||||||
| – UK | 3,380 | 1,638 | 2,936 | 3,080 | 4,727 | 5,101 | 7,208 | 4,422 | 2,916 | |
| – EU28 | 16,758 | 34,858 | 28,756 | 37,563 | 35,509 | 33,078 | 31,693 | 49,976 | 55,984 | |
| Cote d’Ivoire | ||||||||||
| – UK | 6 | 40 | – | 724 | 7,002 | 15,781 | 13,205 | 20,053 | 20,968 | |
| – EU28 | 50,545 | 59,766 | 59,149 | 60,516 | 72,256 | 84,113 | 70,095 | 84,701 | 79,724 | |
| Comment and Analysis It is unclear to what extent direct exports of cocoa paste and cocoa butter to the UK market provide the whole picture. It is possible that some of the imports from EU27 suppliers are simply re-exports of Ghanaian and Ivorian cocoa paste and cocoa butter. If there is a substantial re-export trade then steps will need to be taken to ensure Ghanaian and Ivorian exports of not fatted cocoa paste and cocoa butter exported to the UK via EU27 member states retain their duty free-quota free access to the UK market, if post-Brexit standard MFN tariffs are charged on UK imports from EU27 suppliers.Indeed exporters of not fatted cocoa paste and cocoa butter may need to return to direct exports of these products to the UK, with a potential existing for expanding such direct exports to the UK to take advantage of the tariff preferences which would be enjoyed if the currently proposed UK MFN tariffs on not fatted cocoa paste and cocoa butter were imposed on EU27 suppliers. However, given the ownership structure of in the cocoa sector in West Africa where the Barry Callebaut Group plays a major role there appears to be a marked reluctance to plan for an expansion of local value added processing to serve the UK market since this would directly compete with similar facilities in the Netherlands, Belgium, Germany and France which are part of the same corporate family. Should the Conservative Party win the 12th December 2019 General Elections the market opportunities available will depend on the outcome of the proposed review of the UK’s existing proposed post-Brexit MFN tariff schedule which is due to take place in the first quarter of 2020. This review is likely to take the form of a public consultation in January and February 2020, with Parliamentary scrutiny of the proposed changes, followed by a redefinition of the tariff schedule. The UK’s autonomous MFN tariff schedule would then be ready to enter effect whenever the UK finally leaves the UK customs, with the Conservative Party election manifesto committing a future government to leaving the EU customs union and single market on 1st January 2021. If the current proposed MFN tariffs on “not fatted cocoa paste” and “cocoa butter” were retained in place this would open up opportunities for increased direct exports to the UK. This would probably need to take place on the basis of the existing installed processing capacity, since new investments would not make sense in the absence of clarity on the longer term EU27/UK trade framework for “not fatted cocoa paste” and “cocoa butter”. This is unlikely to become known for a number of years, given the length of time required to complete trade negotiations with the EU. Currently if the capacity already exists in Ghana and Cote d’Ivoire to expand the production of “not fatted cocoa paste” and “cocoa butter” to increase direct exports to the UK market then the governments of Ghana and Cote d’Ivoire should consider submitting a memo to the UK government as part of the 2020 MFN tariff review, outlining the development benefits derived from retaining in place existing MFN duties (as set out in the October 2019 Post Brexit UK-only MFN tariff schedule for “not fatted cocoa paste” and “cocoa butter”) (3). It should be noted that this issue of maintaining in place the October 2019 Post Brexit UK only MFN tariff schedule is of even greater importance in the banana sector not only for Ghana and Cote d’Ivoire but also Cameroon, Belize, Dominican Republic and St Lucia. For bananas the MFN duty of €114/tonne effectively provides a tariff preference for preferred ACP exporters of around 16% of current export values compared to MFN banana exporters, and around 10% of current export values compared to $ banana exporters currently exporting under recently concluded EU trade agreements with Andean Pact and Central American countries. The issue of maintaining in place the October 2019 Post Brexit UK only MFN tariff schedule is also of considerable importance to Ghana and to a lesser extent Cote d’Ivoire in the preserved tuna sector, where the UK is currently proposing to roll over existing EU MFN import duties of 24%. These tariff preferences are also of considerable significance to: Seychelles which exports over €72.8 million of preserved tuna to the UK market; Mauritius (exports of over €62.2 million) and PNG (exports of over €9 million). Against this background, the governments of all concerned ACP banana exporting countries and preserved tuna exporting countries could also usefully consider preparing and submitting memos to the UK government as part of the 2020 MFN tariff review, outlining the development benefits derived from retaining in place existing MFN duties. |
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Sources:
(1) confectionerynews.com, ‘Cocoa price as a soft commodity depends on UK General Election and Brexit impact’, 18 November 2019
https://www.confectionerynews.com/Article/2019/11/18/Cocoa-price-as-a-soft-commodity-depends-on-UK-General-Election-and-Brexit-impact
(2) confectionerynews.com, ‘Ghana’s Niche Confectionery lands €8m loan from Dutch investment bank’, 3 October 2019
https://www.confectionerynews.com/Article/2019/10/03/Ghana-s-Niche-Confectionery-lands-8m-loan-from-Dutch-investment-bank
(3) gov.uk, ‘The Tariff of the United Kingdom’’ Version 1.0, page 922, dated 8th October 2019
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/837199/Tariff_Reference_Document_8th_October.pdf