AMA: Ask Me Anything (About Cocoa or Chocolate) #5 – Solving Poverty

The Question

What five things need to be done first to secure the global cacao supply and help lift farmers out of poverty over the next ten years?

No small questions, eh?

The challenges in solving poverty in farming – and not just in cacao – are decades if not centuries in the making and are complicated by cultural and political issues. There are no easy solutions or quick fixes.

One of the first things that’s important to consider is the root cause of poverty among cacao farmers, realizing that the drivers may be different from other crops and the contributors to poverty in W Africa, for example, may be different from those in other parts of the world. 

One great resource that can be used to help frame what I mean by this is a study undertaken by the Royal Tropical Institute of The Netherlands, Demystifying the Cocoa Sector in Ghana and Côte d’Ivoire. From the introduction:

This major study aims to contribute to the cocoa sector’s body of knowledge and provide a solid evidence base to test common assumptions and beliefs. 

The research covers issues such as household demographics, food security and nutrition, and crop choices and crop diversification. Specific to cocoa, the study investigates why households grow cocoa, and analyses the major aspects of cocoa production and marketing. Household wealth, income and poverty is also assessed, and further disaggregated in a cluster analysis. The study also looks at intra-household dynamics which are brought together in a gender chapter.

Before we can begin to address the challenges we need to know if our assumptions about the root causes are true – any solutions we propose must address the actual issues at hand, and this is where I think most of the existing “solutions” miss the mark. They are not looking carefully at the actual challenges that need solving.

It may also be that there are political factors that get in the way of solutions. From personal experience, I can say that the government cocoa association of Grenada was (in 2010 when I tried with a client to create a social enterprise based on cocoa) completely resistant to anything that interfered with their monopoly control over the local market for cocoa beans. This may have changed since 2010, but if things today are anything like they were back then, then the likelihood for meaningful change is vanishingly small. This may be true in other countries where there are government cocoa monopolies.

Given the above caveats – which represent just some of my thoughts on impediments to change, here are six ideas on how to solve the problem of endemic poverty in cacao. In no particular order:

1: Focus on the Farm Gate Price

Right now, everyone focuses on the commodity exchange and futures price, which is often either FOB (the cost at the port before it gets loaded into a container for export) or CIF (customs, insurance, and freight), or delivered price. Neither of these prices remotely reflect what the farmer gets paid – which can be as little as 40% of the CIF price – for their efforts.

About a decade ago, a well-known and since-discredited NY craft chocolate company trumpeted they paid 4x the market price for beans. Digging into the story, what we learned was this was the delivered price to the Port of NY & New Jersey. The beans reportedly left the home port in a sailboat and apparently neither the required export nor import paperwork properly filed. The price being crowed over did not reflect what the cooperative was paid for the beans, it reflected the final delivered cost of the beans, presumably with added fees and perhaps even fines to cover the issues with the lack of paperwork.

Within the past six months, an Ecuadorian-based chocolate maker claimed they are paying 8x market price for their beans. Upon asking, it was revealed that this was actually 8x the local market price for wet cacao, not the international market price for fermented, dried, beans. 8x the international market price would have been the farm gate equivalent price of over US$22,000/MT. While 8x the going local price for wet mass is good for the farmer, it is disingenuous, to be extremely charitable, for the company to give the impression they were paying 8x the FOB price.

When thinking about farm gate price it’s also important to make sure the price being quoted reflects the same product – wet mass, or unfermented or fermented and dried beans whether farm gate, FOB, or CIF.

2. Decouple Prices and Premiums From Markets

Most premiums are marked to the market price. The organic premium is the market plus a set amount. The same is true for the Fairtrade premium. What is not widely known about the Fairtrade premium is that it’s paid on a sliding scale. The full value of the premium is paid when the market hits a certain price floor. As the market price increases, the premium gets reduced until theoretically, the premium could go to $0.

Lots of specialty cocoa is tied to the market price as well. A “fine” cocoa might be priced at $500/MT above market.

As long as prices are tied to the market, farmers have no control over what their earnings will be. At any time, a trader wearing a $1000 (or £1000 or €1000) bespoke suit sitting in air-conditioned luxury in an office in Chicago, NY, or London or elsewhere can take a position – or more topically, a global pandemic can wreak havoc – that will lower the price of cocoa. As long as farmers assume all of the risk they have no control over their incomes.

Ideally, cocoa – and, in my opinion, all other food products – should not be treated as a commodity subject to hedging, shorting, and other “strategies”. Prices should be based on the actual cost of production with enough money in the system to ensure that sustainability, living income, and other goals can be met. A lofty goal? Yes. Impractical? Maybe. Impossible? I hope not.

3. Certification Organizations Need to Assume Costs and Risk

According to the International Institute for Sustainable Development (IISD) in a 2014 report, about 22% of the world’s cocoa production was covered by one or more Fairtrade, organic, or other certifications in 2012, and of this 22% only about one-third was sold as certified. This means that the bulk of the cost of certification was borne by the producing organizations and so for many – if not most – of them, certification was a money-losing proposition.

One way to look at certification is that it is entities in the global north imposing a set of values and standards on farmers, organizations, and governments in the global south, and making them pay to be in compliance with those values. So, one way to think about certification, and this is the way I think about it, is that it’s de-facto socially-acceptable economic imperialism. Certification organizations impose their values on farmer organizations, get them to pay the costs of certification, and do not guarantee they will purchase all the commodity that is produced.

In other words, the certification organizations assume no market risk and get paid no matter whether or not the certified product earns the “promised” premiums. Furthermore, most of these organizations are not even sustainable as businesses, requiring donations and taxpayer funding to stay in “business”.

One change I would make is to change the economics of certification in ways that force the certification organizations to assume up front the majority of costs and market risks. They would also be required to report back down the supply chain with the same level of documentation and rigor they require reporting up the supply chain. Finally, they would guarantee to purchase all of the cocoa produced under their certification auspices, assuming the risk of making the market for their certified products.

Accuracy in reporting is extremely important – take a look at Tony Chocolonely’s 2019 annual report. On close inspection, the financials (esp. pp 26-27) are far less impressive than TC makes them out to be.

Another change I would make is to ban the practice of mass balance and require 100% traceability for all certified cocoa from the farm to the factory to the consumer.

4. Expand the Percentage of Cocoa Purchased Directly by Small Makers

According to a 2019 report by IISD, the world’s cocoa supply is basically controlled by eight multinationals. The largest of these companies alone purchases about 25% of the world’s crop (over 1 million MT) with the next three-largest companies combining to purchase over 50% of the crop with the other four companies buying the rest.

While the specialty/craft chocolate maker market has experienced phenomenal compound annual growth rate over the past 20 years with respect to the number of makers to over 1000 from just a small handful in 1997 (when Scharffen Berger Chocolate Maker was founded), the total amount of cocoa they purchase is minuscule. I include Bonnat in this group because they were the first company in the modern era to manufacture and market single-origin bars beginning in 1983.

Depending on how you classify specialty/craft chocolate makers, the largest of them purchased on the order of 200MT of cocoa in 2019. At the 2020 Chocoa conference this past February in Amsterdam, Greg D’Alessandre of Dandelion Chocolate said they purchased about 100MT of cocoa in 2019. Companies like Guittard, Valrhona, Domori, and others are very hard to classify as they are predominantly industrial producers with some specialty products.

The average specialty/craft maker purchases less than 10MT/year with many of them purchasing less than half that amount. To make the math easy let’s say 1000 makers purchase an average of 10MT of specialty beans annually. That means the total volume of specialty beans purchased is on the close order of 10,000MT. If we include larger players, I can confidently estimate the quantity at less than 20,000MT. Assuming an average farm gate price of US$6/kg (which is likely high), the total value – being extremely optimistic – of all of the cocoa purchased by the entire specialty/craft market is US$120,000,000, or about 1% of the estimated total value of the entire cocoa crop. Most of that money is spent outside of W Africa, where the need is, arguably, the greatest.

5. Challenge the Model of the Primacy of the Smallholder Farmer

The primary model for economic aid promoted by most NGOs around the world is to preserve the individual smallholder farmer. This is at a time when many buyers are increasingly saying they don’t want to work at that granular a level. Rather than working with individual farmers producing less than 1MT of inconsistently fermented and dried cocoa each year, they want to purchase in lots of 5-10MT minimum with greater consisteny. This suggests that individual farmers would be better off forming small collaboratives where they share labor and other resources. They don’t necessarily need to create large cooperative structures of hundreds of farmers, though this is not necessarily a bad idea if there are good management controls about how money gets distributed and overhead costs can be kept in check.

The focus on maintaining individual farmers as independent businesses is another aspect, in my opinion, of socially-acceptable economic imperialism. 

NGOs, governmental institutions such as USAID, and the IADB funding efforts to support farmers should think about encouraging the formation of  medium-sized (5-20 family) collaborations among and between neighbors, and support solutions related to food security, water security, energy security, and health and wellness, not just on the notion of how much cocoa per hectare results in a ”living wage.” I mention health and wellness because one of the driving factors for child labor in cocoa farms is the physical health of the head of household. If they are not able to work a full day in their farms, children are pressed into the family farming business as low- to no-cost labor.

At the same time, resilience in the form of different farming methods need to be explored. The only thing worse than mono-cropping is monocultures of ideas. Maybe the best approach is extremely high density cocoa farming over a small part of a farm where some of the rest of the land is used for food crops and other land is used to ensure biodiversity and combat the effects of climate change. Maybe not. But should it be explored? Absolutely. There is no silver bullet, no single “right” way. 

In Closing, But Maybe Most Importantly … #6: Educate Consumers That Chocolate (Any Chocolate, All Chocolate) Should Not Be As Cheap As It Is

Implementing ane of the above five suggestions is even remotely possible if there is not the money in the system to pay for the changes sketched out above.

In the end, consumers need to learn that the vast majority of the chocolate they purchase is made with ingredients – especially cocoa and sugar – that are purchased for below the cost of production, with many costs externalized and not even considered when the final retail price is being set. 

The idea that someone should be able to purchase a 100gr bar of 70% cocoa content chocolate at retail for $4.99 (that’s the price of Lindt Excellence and Ghirardelli bars at my local CVS, though with discounting the price can be as low as $2.50 – where the retailer makes the overwhelming majority of the profit – is patently absurd on its face and fundamentally unsustainable.

If we want to solve the problem of poverty (and sustainability and related issues), the end consumer needs to actually pay for what it costs. 

Otherwise – what’s the point?

What are your thoughts? Do you agree with me? Disagree? Are there anything you think I am overlooking or minimizing? Please share with the community in the comments below.

If you are a member of the media and want to engage with me on any or all of these topics or any other, please send an email to thechocolatewire@thechocolatelife.com.