Potential for Upgrading in Financialised Agri-food Chains: The Case of Ghanaian Cocoa

Abstract

We revisit functional upgrading opportunities for developing and emerging market companies in the context of highly financialised food systems. We argue that the assessment of upgrading potential within the global value chain literature lacks consideration of constraints posed by financialisation, not only of the sector within which upgrading takes place but also by the global financial architecture more broadly. For the Ghanaian cocoa–chocolate sector, we show that financialisation acts as limiting factor to upgrading, with contradicting tendencies. First, financialisation of lead firms, eager to outsource non-core activities, has promoted cocoa processing in Ghana, but the resulting consolidation of power hinders further functional upgrading. Second, Ghana’s dependency on cocoa for foreign exchange earnings necessitates upgrading into higher value-added segments, while also undermining feasible upgrading strategies that build on domestic or regional markets first. These contradicting tendencies constitute a middle value-added trap, which is difficult but not impossible to overcome.

Price-Setting Power in Global Value Chains: The Cases of Price Stabilisation in the Cocoa Sectors in Côte d’Ivoire and Ghana

“…The financialisation of commodity derivatives markets in the form of financial actors increasingly investing in derivative-based, and also physical, agriculture assets and (lead) commodity firms conducting more complex financial activities, in addition to financial hedging (Newman 2009 ; Burch and Lawrence 2009 ; Clapp 2014 ), has manifested the relationship between futures and physical commodity prices further. Most strongly, this blurring between physical and financial activities is evident with CTHs, which have had a long tradition in hedging and speculative trading (van Huellen and Abubakar 2021 ).…”

“…In particular, large multi-commodity grinder-traders, such as Cargill and Olam, have used these markets for financial business strategies, creating their own financial services units or hedge funds, investing on their own account, managing third-party money and selling investment products to physical and financial clients in the 2000s (Gibbon 2014 ; Murphy et al 2012 ; Salerno 2016 ). However, most grinder-traders have closed or spun off their own funds in recent years and are focussing more on complex, structured and customised financial hedging services, as well as on over-the-counter markets that allow for more complex products and on market intelligence as part of their core business (Trafigura 2019 ; van Huellen and Abubakar 2021 ). A trader at a top grinder-trader explains it: ‘ We can offer price-insurance with profit opportunities to chocolate manufacturers on top of the physical sales.…”

“…We build on PTBF contracts and integrate exotic derivatives that are increasingly traded over the counter in London and New York ’. These processes have contributed to further consolidation among grinder-traders, as well-developed financial units provide a competitive edge, compared with smaller traders with limited access to financial markets, information and resources (Newman 2009 ; van Huellen and Abubakar 2021 ).…”

“…In the forward-selling process, CMC negotiates premiums with international buyers relative to underlying London cocoa futures prices. The forward sales largely determine the export price ahead of the harvest season and serve as collateral for an annual syndicated offshore loan, which provides working capital for LBCs to purchase cocoa beans and cheap access to foreign exchange for the government (Kolavalli and Vigneri 2017 ; van Huellen and Abubakar 2021 ). The remaining 30% is sold through spot contracts later in the season, exposing COCOBOD to the risk of price drops during the season.…”

“…They could do that in principle, even though it would be more complicated in the Ivorian system. However, beyond substantial knowledge, expertise and networks, which at least CMC traders have due to rigorous training in derivatives trading (van Huellen and Abubakar 2021 ), hedging requires access to large financial resources in US dollars and British pounds, given the large volumes of cocoa beans that the two countries export. This is related to security margins that must be deposited when buying or selling futures contracts, which are adjusted on a daily basis to futures price movements (so-called margin calls).…”