Commodity price trends can impact the political risk environment

08 November 2017

Companies operating in the food and agri sector are familiar with the challenge of commodity prices that fluctuate year on year. However, commodity price trends can also impact the political risk environment facing a firm in a given country.

Understanding these political risks is the first step in implementing an adequate political risk insurance strategy. Firms are likely to experience significant challenges operating in any country that is heavily leveraged to a single agricultural export in the instance of a price downturn. 

CÔTE D’IVOIRE CASE STUDY: FISCAL STRAIN 

In the 12 months to April 2017, global cocoa prices fell by 30%. Côte d’Ivoire relies on the cocoa industry for 50% of export receipts and two-thirds of employment. The price drop, along with a series of unscheduled payments to soldiers, has strained the government’s fiscal position. The fiscal deficit is forecasted to rise from 3.2% of GDP in 2016 to 4.5% in 2017. The government has expanded borrowing to fund its spending, and in June 2017 secured EUR 2 billion in loans from the French government over the next three years. This additional borrowing will push up the country’s debt load and may increase sovereign credit risks in the coming years, exposing firms with government contracts to non-payment risks. 

COCOA & CONTRACT ALTERATIONS 

Commodity price shifts can also positively impact foreign investors. In previous years, domestic companies had campaigned to expand their share of cocoa exports in Côte d’Ivoire, elevating concerns among international firms that local content requirements would lead to contract alterations. In 2014, traders were instructed to export 150,000 tonnes of the harvest through domestic exporters. 

However, many domestic companies, who had gambled on continued price rises, were unable to withstand price falls and were forced to default on purchase deals, leading to industry losses of USD 329.5 million. As the government looks to support the struggling sector, it is likely to take an accommodative stance towards more established foreign exporters, reducing the likelihood of contract alterations or expropriation. 

SMUGGLING & SECURITY RISKS 

To respond to the collapse in cocoa prices, the government announced in March 2017 that fixed farm-gate prices for the mid-crop would be reduced to XOF 700 per kilogram, the lowest price offered to farmers since 2012. This has elevated the risk of protests and strikes. In February 2017, cocoa workers protested in Abidjan, causing business interruption for cocoa firms. In addition, the Ghanaian government has maintained higher cocoa prices, and this is likely to increase the smuggling of cocoa across the border. Any efforts to prevent smuggling by the Ivorian authorities may lead to further unrest by cocoa workers, and greater disruption for international exporters. 

RESPONDING TO RISKS 

Our Credit, Political & Security Risks division highlights that by measuring political and political violence risks, a robust insurance strategy can be constructed to allow food and agri companies to realise opportunity in changing risk environments.


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For further information, please contact Stephane Baldanoff, Managing Director of Food & Agribusiness at Stephane_Baldanoff@jltasia.com