Cocoa Price Floor with a Binding Budget
Cameroon's cocoa marketing board fixes a guaranteed farmgate price of 1,500 FCFA per kilogram for the coming season. At that price, farmers in a producing region plan to supply 90,000 tonnes, but licensed buyers are willing to purchase only 60,000 tonnes. At a free-market price of 1,200 FCFA/kg, farmers would supply 70,000 tonnes and buyers would demand 70,000 tonnes. The board has a storage capacity of 20,000 tonnes and a budget of 10 billion FCFA to buy any surplus. World cocoa prices are falling, and a neighbouring country is selling at 1,150 FCFA/kg. Farmers are smallholders with few alternative cash crops; buyers include a few large exporters. The board must decide whether to defend the floor for a second season.
1. Calculate the surplus that the board must buy if the guaranteed price is maintained, and the cost of buying it. Explain why the board's storage capacity and budget create a problem.
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At 1,500 FCFA/kg, quantity supplied is 90,000 t and quantity demanded is 60,000 t, so the surplus is 30,000 t. Since 1 t = 1,000 kg, the price is 1,500,000 FCFA/t. The cost of buying the surplus is 30,000 × 1,500,000 = 45,000,000,000 FCFA, or 45 billion FCFA. The board's budget is only 10 billion FCFA, which would buy 10bn ÷ 1.5m = 6,666.7 t. Storage capacity of 20,000 t is also less than the 30,000 t surplus. Therefore the board cannot defend the floor on these figures without rationing purchases, imposing export controls or letting the surplus rot. A guarantee that cannot be financed is not credible; farmers may plant on the expectation of the floor and then face delayed payments.
2. Using the figures, calculate the price elasticity of demand and supply between 1,200 and 1,500 FCFA/kg, and comment on which side of the market is more responsive.
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Using the midpoint (arc) method: demand changes from 70,000 t to 60,000 t, so ΔQ = −10,000 and average Q = 65,000. ΔP = 300 and average P = 1,350. PED = (−10,000/65,000) ÷ (300/1,350) = −0.1538 ÷ 0.2222 = −0.69. Demand is inelastic. Supply changes from 70,000 t to 90,000 t, ΔQ = 20,000, average Q = 80,000. PES = (20,000/80,000) ÷ 0.2222 = 0.25 ÷ 0.2222 = 1.13. Supply is elastic. The asymmetry explains the surplus: a 25% price rise from 1,200 to 1,500 raises quantity supplied by about 28.6% but reduces quantity demanded by only about 14.3%. Buyers are not very responsive in the short run, while farmers can sell more cocoa and switch from other crops. The more elastic side of the market adjusts more, so a floor above equilibrium creates a large oversupply.
3. Evaluate whether the board should maintain the floor, remove it, or replace it with a direct income transfer to farmers. Refer to the budget, storage, world price and market structure.
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Maintaining the floor protects incomes but costs 45bn, far above the 10bn budget, and 10,000 t of the surplus cannot even be stored on top of the 20,000 t capacity. With a falling world price and a neighbour at 1,150 FCFA/kg, buyers will not willingly pay 1,500; cocoa may leak across the border or be sold informally below the floor. Removing the floor lets the market clear at 1,200, but farm incomes fall by 300 FCFA/kg on 70,000 t, or 21bn FCFA, and rural poverty may rise. A direct income transfer could cost about 21bn if perfectly targeted to current output, less than 45bn, and avoids creating a surplus; but it may be hard to target, could encourage overproduction if tied to output, and does not solve storage or quality problems. A better package is a phased reduction of the floor, a time-limited transfer to smallholders, and public investment in storage, grading and processing so that farmers capture more value. The board should also publish a credible budget rule.