COCOBOD last week signed an agreement with an international consortium of 28 banks for a US$1.5 billion receivables backed loan which will be used to pay local farmers for their cocoa produce for the 2021/22 crop season. This is the largest amount Ghana has taken off the international money market over the past five years; last year it took US$1.3 billion.
However COCOBOD has been encouraged to increase the quantum taken by its record high production of 1.04 million tonnes achieved in the just ended 2020/21 crop season, which it hopes to exceed again in the upcoming 2021/22 crop season due to anticipated further improvements in productivity.
Crucially the increased demand for loan financing by COCOBOD was met by willing lenders. COCOBOD was actually offered US$1.7 billion but opted to stick to the US$1.5 billion it had decided to seek. Instructively early bird offers of some US$5I5 million were made by the arranging banks even before the deal had been fully structured illuminating the confidence the international financing community has in Ghana’s cocoa industry facilitator and regulator.
This annual facility is the largest annual agricultural financing in sub Saharan Africa and COCOBOD has never defaulted over the 30 years it has taken the facility and with regard to last year’s actually completed repayments two months ahead of schedule,. The resultant confidence allows COCOCBOD to borrow at significantly lower rates than government itself.
Not only has COCOBOD never defaulted in nearly three decades of taking this annual facility, it has never sought refinancing either. Every year COCOBOD completely amortizes the loan in full out of its own cash flows from sales of beans purchased from farmers with the proceeds of the loans.
Instructively COCOBOD has often found itself in a somewhat precarious financial position and indeed the current administration is taking steps to resolve long standing indebtedness, which is different from the annual facility. Basically, because COCOBOD is charged with executing state policy on giving farmers incentives – ranging from scholarships for their children, the provision of roads in cocoa producing areas and other social interventions – as well as economic incentives such as paying farmers at least 70 percent of the sales proceeds even after providing subsidized inputs such as seeds and fertilizer as well as crucial services such as mass spraying of farms and most recently, hand pollination services, it sometimes spends more than it earns. This situation is worsened from time to time by poor corporate governance which diminishes the efficacy of the Board’s spending.
Indeed, in 2017, when the current management assumed office COCOBOD had medium to long term indebtedness of some GHc10 billion apart from the annual facility. Worse still this debt was being constantly refinanced with high interest short term bills issued through the Bank of Ghana. However management has taken a US$700 million syndicated loan led by the African Development Bank to restructure the industry in several ways including the longer term refinancing of that debt. But instructively, COCBOD has never let its structural financial difficulties get in the way of servicing its annual facility on schedule. This excellent debt repayment record has made it not just the biggest annual agricultural financing in Africa, but the safest as well, this reflecting on the cost of the financing.
This year’s loan will attract interest of 1.1 per cent above the one month London Interbank Offered Rate (Libor) a benchmark rate at which some of the world’s leading banks charge one another for short-term loans. The loan will also attract a commitment fee of 0.62 percent per year and an upfront flat fee of 1.25 percent.
The lead arrangers of the syndicated loan are Standard Chartered Bank, the London domiciled Ghana International Bank, NEDBank, Natixis Bank, the Industrial and Commercial Bank of China, Rabobank amd MUFG Bank.
The facility is repayable in seven equal monthly instalments from February to August 2022.
For the second year in a row the signing of the deal was done virtually due to the effects of the global COVID 19 pandemic. The chief executive of COCOBOD, Joseph Boahen Aidoo signed on behalf of COCOBOD, while representatives of the participating banks signed for their respective banks.
The increase in the amount taken this year reflects Ghana’s improving production. COCOBOD’s target is to improve cocoa productivity per hectare to 1,500kg by 2025 and currently, cocoa farmers who embrace the hand pollination, mass pruning, irrigation, fertilizer application and mass spraying programmes have already significantly increased their productivity levels from 450kg per hectare to around 1,000kg over the past four years.
Furthermore COCOBOD has not only scaled up the rehabilitation of cocoa farms to treat 156,000 hectares of diseased and overage cocoa farms in the country but has also increased the number of hybrid seedlings to be produced to about 140 million for the 2021/2022 crop year.
This indicates that although Ghana’s record high production of about 1.04 million tonnes for the 2020/21 crop season, although helped by favourable weather, is likely to be sustained – or possibly exceeded – going forward.
Importantly not only has overall production risen to a new high; local processing capacity has been significantly improved too as COCOBOD targets processing half of total 2025. Again this requires astute financial juggling; the Board sells to local processors at a cheaper price than it gets from exports of raw beans, in order to make local processors such as chocolate makers internationally price competitive. Thus COCOBOD sacrifices its own revenues to ensure the growth of one of Ghana’s potentially most internationally competitive industries.
But COCOBOD is embarking on a fundamental, more sustainable financial model. By helping farmers to triple their productivity, it will enable farmers to pay for their production inputs and services at commercial, rather than subsidized rates and still enjoy bigger profitability than hitherto. In turn this will make COCOBOD ‘s finances more sustainable.
The first tranche of at least half of the total loan amount is expected to be received by Ghana between October 2 – 4, just as the new cocoa season begins. The monies are coming at a most opportune time; Ghana’s ongoing strong economic rebound after a recession during part of 2020 has significantly increased demand for foreign exchange and this led to an unusual depreciation of the cedi against the US dollar, of 1.6 percent between July and mid September this year. Part of the cocoa loan proceeds will be used to beef up gross international reserves thus reassuring the local forex market of availability of forex, and the BoG may decide to increase the amount it puts up for sale on its fortnightly forward forex auction too, to discourage currency speculators from taking positions against the cedi for profit.
President Nana Akufo Addo has revealed that government plans to increase the guaranteed cocoa price it pays to farmers during the upcoming growing season by 28 percent, in line with an expected rise in neighbouring Ivory Coast. This the same increase implemented for the just ended 2020/21 crop season, the first rise in several years, because global market prices have been shaky.
The price rises are largely due to implementation by the two governments of a price floor of $2,600 per tonne and a Living Income Differential (LID) of $400 per tonne, meant to tackle poverty among farmers.
The two countries account for over 60% of global cocoa bean production.
