Cocoa Price Floor and Farmer Incomes
A cocoa-growing country produces 60,000 tonnes a year. The world price is $2,400 a tonne, but the government guarantees farmers $3,000 a tonne and buys any output that private buyers will not take at that price. At $3,000, domestic processors demand 7,000 tonnes; exporters will buy only at the world price, so the government must purchase the rest. Storage and handling cost $150 a tonne a year, and the government can resell stored cocoa on the world market at $2,400. There are 20,000 cocoa farmers; the largest 10% produce about 45% of output. Small farmers say traders delayed payments last season. The finance ministry estimates that a direct income transfer of $300 per farmer would cost less than the price floor, but it would not keep cocoa output stable. The country also faces a shortage of foreign exchange and a commitment to reduce deforestation linked to cocoa expansion.
1. Calculate the quantity the government must buy, the net cost per tonne and the total budget cost. State the main assumptions.
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Government purchase = supply at $3,000 minus domestic demand at $3,000 (exporters will not pay above the world price) = 60,000 - 7,000 = 53,000 tonnes. Purchase outlay = 53,000 x $3,000 = $159.0m. Resale revenue = 53,000 x $2,400 = $127.2m. Storage = 53,000 x $150 = $7.95m. Net budget cost = 159.0 - 127.2 + 7.95 = $39.75m, or $750 per tonne purchased. This excludes transport, administration, financing and quality loss. If farmers expand output in response to the guaranteed price, the purchase and cost rise. If the world price falls below $2,400, the net loss per tonne widens. If domestic processors can import at the world price, the domestic demand at $3,000 may be even lower, increasing the surplus.
2. Who gains and who loses from the price floor? Use the output shares to assess the distribution of gains.
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Farmers gain the $600 per-tonne premium on all 60,000 tonnes, a gross transfer of $36m, but the government's net cost is $39.75m, so the scheme is expensive per dollar of farmer gain. The largest 10% of farmers produce 45% of output, so they capture 0.45 x $36m = $16.2m. The remaining 18,000 farmers share 0.55 x $36m = $19.8m, an average of about $1,100 each. The floor therefore helps large farmers most in absolute terms, even if small farmers gain proportionally. Taxpayers and domestic processors lose; processors pay $3,000 rather than $2,400 for 7,000 tonnes, a $4.2m cost. The guarantee also encourages output expansion, which may increase deforestation and lower the world price. A direct transfer of $300 per farmer costs $6m, far less, but it is much smaller than the average premium and does not keep output stable. A targeted transfer to small farmers, or a price-insurance scheme, could improve distribution at lower fiscal and environmental cost.