Top global cocoa producers Ivory Coast and Ghana have imposed a fixed "living income differential" of $400 a tonne on all cocoa contracts sold by either country for the 2020/21 season, an official letter seen by Reuters shows.
The premium, which replaces an earlier proposal for a floor price for cocoa contracts, is part of a wider plan to combat poverty among farmers in Ivory Coast and Ghana, which together account for more than 60% of global supply.
Cocoa from Ghana and Ivory Coast already trades at substantial premiums to the futures market due to its quality.
Chocolate makers including Mars and Hershey's told Reuters they support efforts to relieve farmer poverty, but traders said the plan could lead to surplus production and might eventually prompt them to seek other sources of supply.
The West African neighbours said last month they would fix a minimum price of $2,600 per tonne free-on-board (FOB) that chocolate companies must pay from the 2020/21 season if they want to access their cocoa.
Cocoa prices on ICE Futures Europe hit a one year high of 1,939 pounds ($2,424) this week amid confusion over a plan that marks the biggest shake-up of the cocoa market in years.
Funds raised by the living income differential (LID) will be used to help increase payments to farmers, with the aim being for them to get 70% of a $2,600 a tonne (FOB) target price, the letter sent by the two governments to a trade federation says.
If market prices rise above $2,900 (FOB), proceeds from the LID will be placed in a stabilisation fund that would aim to ensure the governments can pay farmers 70% of the $2,600 target price when market prices fall.
Ghana and Ivory Coast both guarantee a farmer price at the start of each season.
The LID will apply in addition to the normal country differentials, the letter says.
"Short term they'll win (on price) but how long will it be before industry reorganise themselves and Ivory Coast and Ghana have too much production they have to control," said a Europe-based trader.
Ghana and Ivory Coast last month suspended forward sales of cocoa for the 2020/21 season to give themselves time to implement the new pricing mechanism.
Companies at a meeting last week in Abidjan to discuss the plan included Hershey, Mars, Blommer Chocolate, Cemoi, SucDen, Mondelez, Touton, Barry Callebaut, Cargill, Olam and Ecom Trading.
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