ANALYSIS-Ivory Coast's cocoa reform at risk from falling world price

* Liffe cocoa prices down around 12 pct since Oct 1

* A fall in fixed farmer price could curb future output

* Global cocoa deficit expected in 2012/13

LONDON/ABIDJAN, Feb 27 (Reuters) - Reforms designed to give Ivory Coast cocoa farmers better returns could turn sour, as a sinking world market may force the world's top grower to cut its farmer price, risking a political backlash and jeopardising future supply.

Under a sweeping overhaul of the cocoa sector aimed at improving farmers' incomes and encouraging reinvestment in ageing plantations, Ivory Coast forward sold the bulk of its 2012/13 production.

Selling the crop in advance of its harvest enables the government to give a fixed price to farmers.

But last week Liffe cocoa prices fell to their lowest in 10 months, making it increasingly likely that Ivory Coast will have to cut its fixed farmer price in the coming season.

"If they sell at current price levels they're going to be under pressure either to drop the farmer price or cut indirect subsidies, neither of which are likely to be good for cocoa production," a European trader said.

The Coffee and Cocoa Council (CCC) set a government guaranteed farmgate price of 725 CFA francs ($1.50) per kg, representing 60 percent of the CIF (cost, insurance, freight) export price, for the 2012/13 season which began on October 1.

Since then Liffe cocoa prices have fallen by around 12 percent, compounded by weakening sterling - the currency the contract is priced in - pointing to a necessary drop in the 2013/14 farmer price which will be set in September or October.

"The price for farmers next year has to be higher than this year, or at least the same, otherwise they are going to start questioning the benefit of the current reform and begin thinking about moving away from the sector in favour of rubber in the long-run," said the head of investments for an international exporter in Ivory Coast.

PRICE FLOOR

It's not the first time Ivory Coast has been challenged by falling cocoa prices.

In the 1980s its government tried to create a price floor by refusing to sell cocoa below a level which was significantly above the world price. However, they eventually had to sell.

Farmers lost out subsequently because the farmer price had to be reduced for the following crops.

Dealers said the difference now is that there are alternatives for how the government could keep the fixed farmer price at its current level or higher.

Options include reducing taxes or redirecting funds now used to build a reserve fund to cover the risk of defaults.

"The government did cut its share (via taxes) down to 18 percent from 22 percent for this main crop, theoretically they can go further down to maintain the price," said Derek Chambers, head of cocoa at France-based commodities firm Sucden (Groupe Sucres et Denrees).

"At the present time there's 50 CFA per kilo being collected to build the reserve fund up, so if they can get the reserve fund up to its required level and not touch it by the end of the September, they could throw that back in the pot and afford to see the market down at the equivalent of 675 and not change the price."

However, as the reform was a pre-requisite for International Monetary Fund (IMF) backed debt relief, this could limit Ivory Coast's room for manoeuvre.

"Past efforts to stabilise farmgate prices in the context of a falling market made difficult situations worse," said IMF Resident Representative in Ivory Coast Wayne Camard.

"The system that was introduced last year includes a government commitment to set the farmgate price at 60 percent of world prices, based on realised forward sales, in order to balance farmers' need for some stability with the difficult reality of lower prices. I see no reason to question that commitment."

The government is already in discussions with cocoa exporters over lowering the price of the mid crop which is generally smaller beans than the main crop.

Repeated attempts to secure comment from Ivory Coast's CCC were unsuccessful.

A Reuters January poll of 21 analysts and traders forecast a global cocoa deficit for the current crop year ranging from 25,000 tonnes to 150,000 tonnes.

There are concerns that a fall in the farmer price could lead to larger deficits in future years as growers turn away from the crop.

"The price is already at the limit of being acceptable to maintain production. If they have a series of seasons with lower prices, production will not only not grow, it will decline, as people will move to more profitable crops such as palm, rubber, or other food crops," said Sucden's Chambers.

The Ivory Coast's auction system is currently offering forward sales for both the 2012/13 and 2013/14 crops but dealers don't think much additional volume has traded for 2012/13 in recent months, so the country still needs to make up for being undersold on a crop that is exceeding expectations.

"There is a rumour that the Ivory Coast is undersold for the 2012/13 crop as they have more cocoa coming out than they have sold forward," said Eric Sivry, head of agri options brokerage at Marex Spectron.

For now, either Ivory Coast gets lucky and the fundamental picture turns more bullish, sending the market higher, so they can sell into a rally, or they will have to sell and take their chances.

"I don't see anything that plays in their favour. Their only chances are to have a slow start to the main crop setting, you want Ivory Coast and Ghana to be well sold forward so there's no sales pressure, and you want to have the speculators short," said a European analyst.

However, the reality is that forward sales are lagging, speculators are long, and industry is also well covered so it won't be chasing the market higher, the analyst added.

(Additional reporting by Joe Bavier in Abidjan; editing by Veronica Brown and James Jukwey)