Is there enough money in the cocoa supply chain?

The latest Cocoa Barometer 2015, published by a coalition of European development and campaigning organisations, makes for interesting reading.

It looks at value distribution within the cocoa supply chain and asks whether the many sustainability developments that have sprung up in the cocoa sector are resulting in sufficient income for cocoa farmers. It focuses on Ghana and Cote d’Ivoire, which between them produce most of the world’s cocoa.

The report gives an overview of the cocoa supply chain context:

  • Most cocoa farmers live in poverty and are ‘unorganised’, i.e. not in co-operatives or other organisations that can represent them and their interests.
  • The cocoa supply chain is highly consolidated, with just a handful of companies controlling the processing of cocoa and the manufacturing of chocolate.
  • Certification initiatives – the three leading ones by volume being Utz Certified, Rainforest Alliance and Fairtrade – now account for almost 16% of global chocolate sales.
  • Companies and industry bodies also have their own sustainability initiatives, but there are few independent third-party evaluations of these.

Most of the sustainability approaches being funded by the chocolate industry, including those of the certification initiatives, focus on increasing farm productivity. It is a vision that has been most clearly articulated by Mars: increase cocoa yields, and improved income for farmers will follow.

“I’m really proud that our iconic Mars Bar brand is at the forefront of Fairtrade’s new Cocoa Sourcing Programme. It’s a crucial next step in our global commitment to certify that 100 percent of our cocoa has been produced in a sustainable manner by 2020 and it means that all three of our top UK chocolate brands now source certified cocoa, supporting farmers to improve productivity and yields and ultimately leading to improved income and better quality of life for farmers, their families and their communities.”
- Blas Maquivar, President, Mars Chocolate UK

The Cocoa Barometer report is more sceptical. After all, basic supply and demand economics suggests that increasing the supply of cocoa will result in falling prices overall.

“This could increase the dependency of farmers on cocoa and additionally lead to an oversupply of cocoa and to decreasing prices. It is at present unclear whether investing in higher productivity – leading to additional production costs for inputs and hired labour – is a functioning business model leading to higher net farm income.”
- Cocoa Barometer 2015

The report shows that productivity is an issue. Yields per hectare are lower than they could be, and farmers would benefit from training and subsidised inputs. The size of cocoa farms has also been decreasing over recent decades and the report explores the possibility that many farms may be too small to be economically viable.

But increasing yields isn’t enough if prices are too low. So what do cocoa farmers get paid?

The report models the cocoa value chain in West Africa. The average cocoa farm is around 3 hectares in size, about the same area as 4 football pitches. This is actually quite small for a farm: the average size of a European farm is 20 hectares. Even a traditional small family farm in Europe would still be around 6 hectares. The average cocoa farm will produce one or two tonnes of cocoa beans a year; one tonne is 16 sacks of cocoa.

The average farmer will make between $1,400-$2,000 profit a year, at most about $5 a day, which will need to support 6-10 dependants. So a cocoa farmer and their dependants will be living on between $0.50-$0.84 a day, well below the World Bank’s extreme poverty line of $1.25 a day.

Value distribution per tonne of cocoa

“To ensure a living income, farmers have a responsibility to work hard and efficiently, and to deliver a good product. However, even if one were to significantly change variables such as yield, and farm size, the possibility for a cocoa farmer to escape poverty is only marginal if the farm gate price remains at present levels. Only if the price is significantly increased in combination with these two factors can farmers hope to escape poverty.”
- Cocoa Barometer 2015

One challenging point made in the report is that the introduction of third party certification initiatives does not seem to be significantly improving the economic situation of cocoa farmers.

It is hard to assess this though, as Fairtrade, Utz Certified and Rainforest Alliance standards can shape farmer incomes in a variety of ways.

For example, the Fairtrade Premium of $200 paid on every tonne of Fairtrade cocoa purchased usually doesn’t go back directly to individual farmers, it is spent by the farmer’s co-operative. This might be on community projects like water wells and medical clinics, business improvements like a new cocoa warehouse, or farmer education and training, all of which impact on the quality of farmers’ lives. Fairtrade stipulates a minimum price under which cocoa cannot be sold ($2,000 a tonne) but the world market price has not been below the Fairtrade minimum price for eight years so it has not come into play for some time.

The report does miss the focus that Fairtrade has on bringing producers together in organised groups that have economic and political power. Fairtrade also focuses exclusively on smallholder farmers, rather than plantations, in coffee, sugar and cocoa. This is a fundamental challenge to the inequities built into plantation production.

Utz Certified and Rainforest Alliance do not have a fixed premium, it is up to the farmers to negotiate a price premium for their certified cocoa with the buyer. There may well be income gains as a result of increases in agricultural yield after training in more sustainable farming practices.

The Cocoa Barometer calculates the financial benefits of certification before deduction of costs as between $150 and $200 per tonne, at best increasing a farmer’s income by 10%. The cost of membership fees and auditing costs still have to be met from that income as well.

The report looks at what would happen if we were to somehow distribute half of the chocolate profits of the major manufacturers and processors among the approximately 5.5 million smallholder cocoa farmers in the world. It would raise their annual incomes by €325, an increase of 31%. This is more impressive than 10%, but still leaves farming families in West Africa living on about $1 a day, below the extreme poverty line.

Real cocoa prices (2013 values), 1850-2013 from Cocoa Barometer 2015 report

It is striking if you look at long term cocoa prices, adjusted for inflation, to see that the price of cocoa over the last three decades has been well under the long term average. The Fairtrade Minimum Price of $2,000 per tonne is the most ambitious contemporary attempt at a price setting mechanism for cocoa, yet by historical standards it is a very low price indeed. The only other times the price of cocoa was as low as it has been in recent decades were during the World Wars and Great Depression of the early twentieth century and during the global recession of the 1860s and 1870s.

The suggestion is that we need to not only redistribute value through the supply chain, we need to put more value into the supply chain in the first place and increase the price of cocoa and chocolate.