KPMG urges spot sale system to address I Coast cocoa defaults

- Global audit firm KPMG has urged Ivory Coast to introduce a spot sales system for local cocoa exporters who were responsible for defaults on 148,000 tonnes of contracts in the last growing season. The world's top producer sells forward the bulk of its anticipated harvest to be able to set a minimum price for farmers at the start of its October-September growing season.
But world market prices fell 40 percent over the course of the 2016/17 season and exporters were unable to honour their commitments to suppliers, forcing Ivory Coast's cocoa marketing board (CCC) to resell their contracts at a loss.
In a report submitted to the government in March and seen by Reuters on Friday, KPMG said the PMEX/COOPEX exporter group, which includes more than a dozen local export companies, was responsible for two-thirds of the 222,000 tonnes of contracts in default during the 2016/17 season.
The total value of the contract defaults was 399 billion CFA francs ($719.3 million) and the Ivorian government lost 199 billion CFA francs reselling them, the report said.
The defaults came about when PMEX/COOPEX members tried to compete with larger multinational firms and boost revenues by speculating that global cocoa prices would rise rather than locking in contracts, it said.
"Their difficulty getting export permits leads them to take risks," the report said, adding that PMEX/COOPEX members went from buying 11 percent of forward sold contracts in 2014 to 23 percent in 2017.
It recommended that Ivory Coast no longer sell forward cocoa contracts to small exporters and instead limit them to buying on spot markets, where speculation is limited, sales or in partnership with multinational companies in which they export the beans but the partner buys the contract.
The exporters would earn smaller margins on these kinds of sales, requiring action by the government to boost their access to international contracts, the report said.
CCC officials declined to comment on the report. PMEX/COOPEX members declined to speak on the record but some said on condition of anonymity that they welcomed the report's recommendations.
"We are in favour of that. We are at 200,000 tonnes currently (of international contracts) but if the government can raise this to 400,000 tonnes, it will allow us to boost local players," the director of one company said.