What’s a fair price?

Power and wealth are out of balance in our current agricultural trade system. Chocolate is a $100 billion per year business with 4 companies accounting for over 75% of the industry’s market share. About 60% of the chocolate consumed around the world is made of beans that come from two countries: Cote D’Ivoire and Ghana. (Cocoa Barometer 2015). For comparison, less than 5% of the chocolate consumed globally is made by the delicious craft, speciality and sustainable chocolate brands we have grown to love (ICCO data).

In the past 4 years, I have come to know many of the cacao producers, buyers and intermediaries that comprise this 5%. What unites this group is a joint commitment to create positive social and environmental impact and level the playing field for global farmers through trade. In order to know what is fair and which factors contribute to farmer well-being, this group has been cultivating the means of understanding what is meaningful and valuable to communities at origin. Part of this process includes the building of relationships which is fundamental to designing agreements and reciprocal exchanges that fulfill the needs and desires of both parties. As a result, efforts by this sector to improve farmer well-being and equity often extend far beyond any level of compliance.

How do you define, measure and communicate the level of care required to respect the product, the producers of the product, and the land from which the product is grown? Translating concepts of “quality of life” or “care” into the nuts and bolts of supply chain operations and simple black or white measures is no simple task. The language of the heart does not fit into standard templates or check boxes. As a result, the industry struggles with how to convey the value of extensive efforts clearly to customers. This becomes particularly evident when the average consumer is baffled by the $4-$12 price of a sustainably and/or ethically produced craft chocolate bar. Without an understanding of or a connection to the additional value they are paying for, consumer demand within this sector remains relatively low.

Building trust

A lack of trust within the complex web of trade relationships from farm to port to chocolate maker to consumer lies at heart of this power imbalance. Consumers are looking for stories to trust while producers and buyers are looking to build reliable relationships with one another. Understanding prices and wages paid to farmers as well as the relationship of these metrics to other value created at origin is foundational to building trust and determining impact. For example, other “value” here can mean the work done to improve quality of product, soil and ecosystem health, or different forms of exchange such as meals, healthcare or education. As the sector for non-commodified cacao grows, so does the need for understanding and managing complex trade networks. These networks are an emerging form of the traditional value “chain” comprised of a number of interrelated actors exchanging a diverse array of products and services based on what is needed.

This article highlights 2 key challenges and corresponding questions being explored by this sector: (1) Determining a fair wage and (2) Assuring accountability and verification.

1. Determining a fair wage

What is a fair price to pay a cooperative or exporter after the beans have been processed? And then, what is a fair wage to pay producers at the farm level?

Certifications such as FairTrade, UTZ and Organic led to an increase in customer awareness and trust through the development of standards. Yet research increasingly shows that premiums offered by certification bodies are too low to make a significant difference in farmer livelihood. Furthermore, static metrics and prices alone often fail to tell the whole story.

Many chocolate brands buy beans directly from cooperatives or businesses that process or export the cacao. They wonder, “How much do these organizations pay to farmers for their cacao? Is it a fair price? And compared to what?” Many people in the industry desire some sort of standard or method of measurement that is simple to interpret. The reality facing cacao supply chains is that no two sourcing situations are alike. Many chocolate makers in the industry are taking innovative approaches towards better levels of transparency and accountability to level the playing field for global farmers and build trust along the chain.

Jesse Last, Taza’s Chocolate Cocoa Sourcing Manager, is encouraged by his company to ask “the hard questions” above as part of a commitment to radical transparency. This year’s 2016 Transparency Report documents the answers found to these traditionally unasked questions and the lessons learned along the way. The report tells the story of the process Taza went through to understanding assumptions and outcomes, and includes 5 steps Taza takes towards understanding price: (1) Trust and verify (2) Orienting amid the numbers (3) Comparing apples to oranges (4) Value beyond price and (5) Seriously Good and Fair for all. These steps present a good outline of the challenges we’ve heard and those which are highlighted throughout this article.

Taza Transparency Report 2016

So what is a fair reward for the added care that goes into making a non-commodified product that respects the people and land from which it’s grown? Jesse notes the challenge of making sense of static numbers without understanding context. For example, the price paid from his partners at origin to the farmer fluctuate from 50–76%. To better understand relevance and fairness, he created a benchmark based on the Cocoa Barometer’s estimate that “the average cacao farmer receives 68% of the price paid to the origin exporter.”

Dandelion Sourcing Report 2015

After publishing their 2015 Sourcing Report, Greg D’Alesandre, Dandelion Chocolate’s “Chocolate Sourcerer,” posed similar challenges in Session 6 of the Collaborative Trade Accelerator. This accelerator event was hosted by Yellow Seed at the Impact Hub Berkeley with the aim of designing more equitable and transparent supply chains. He asked the group, “How can Dandelion best show cacao pricing, including price paid to producers in an ‘apples to apples’ comparison?” The barrier to answering this question is the reality that there are complex differences between how somebody gets paid — for example, for wet beans versus fermented beans; or as an employee versus as a worker of a co-op or someone on a single estate who own the land. “The complexity presents a big challenge for us. This includes how do you understand that someone is being treated fairly? I think this is one of the places where a lot of the certifications fail. They have very specific metrics and rubrics but to answer the real question of fair treatment is a very difficult one.” See Yellow Seed blog for full details of the discussion including recommendations presented by participants.

Arianna Valentini, from We Farm, a mobile-based platform that enables small-holder farmers to ask questions via text and receive crowd-sourced answers, agrees that price is equally challenging for farmers to understand. “One of the most common questions we receive on the WeFarm platform for cacao farmers is ‘what is the price of cocoa?’ Arianna Valentini shares during Session 6 of the Accelerator. “The price the farmer will be paid depends on the coop or the services associated and it fluctuates greatly between different areas, even within the same country. So it is very hard to give a specific price for cacao.”

“The commodity market is one economy. However, when looking at other types of sourcing, especially for cacao, we are literally talking about hundreds of economies,” Nate Hodge from Raaka Chocolate shares in an interview around the need for greater transparency. “There is so much that happens to cacao after it leaves a farm. Much of the additional value that goes into making a higher quality or more sustainable product is often overlooked when considering a fair price. For example, at the farm level skills and practices for additional quality and fermentation and drying techniques are distinct from industrial cocoa production.” Nate sources from a number of origins and like Jesse also struggles with knowing how to standardize or determine what equates to a fair price for farmers, “For each source there are specific labor laws and import and export taxes. Labor and day rates also vary with each source and sometimes include payment in other forms. Some provide free lunch, free transportation or even living expenses. If you suddenly started paying double to a farmer, you could inevitably mess with the local job market.”

Uncommon Cacao and their partner Maya Mountain Cacao are other pioneers of radical transparency and meaningful impact in the cacao trade industry. Their Transparency report for 2015, includes their story and the stories of their partners. The key indicators they track include average farmer income, farmer sales and direct and indirect beneficiaries. Their reports have served to build trust and inspire collaboration and improvement for many in the industry.

Jack Steijn, Director of Equipoise, organizer of Chocoa (www.chocoa.nl) , an international market place for cacao beans and conference on sustainable cocoa, and Chair of the CEN & ISO Committees that are developing an ISO standard for sustainable and traceable cocoa, suggests a different approach to contextualizing wage paid to farmer: “Farmer revenue (size of the land x yield x price — costs) as a way to better understand the context of value being added and expended. Some farmers only obtain 300 kg per hectare, whereas plantations easily reach 3,000. The advantage of the existing standards as well as the new ISO standard is that they help to increase yields and decrease costs. At a farmgate price of CFA 1,100 in Côte d’Ivoire (roughly $2,-) and a premium of 100, a farmer is better off raising his yields by applying the Good Agricultural Practices in the standard than by doubling his premium. Orienting towards profit also encourages producers to pay attention to business sustainability and entrepreneurship. This doesn’t mean that premiums are not important.” Jack suggests, “the farmer really needs those to be able to invest in meeting the requirements of the standard. For long term and stable improvement of farmer livelihoods a broader approach than just ‘fair price’ is needed.”

In sum, the question of fairness is an important one. As an industry, we have just begun to scratch at the surface of a larger conversation around “fair value.” Radical transparency, in terms of definition, assumptions and process is giant step forward towards greater awareness, engagement and continuous improvement.

How do multiple stakeholders in a supply chain create trust over geographical, cultural and language divides?

2. Assuring accountability and verification

Once fair rewards are committed, how can companies ensure value is being distributed fairly back to the producer?

Many chocolate companies rely on trusted long-term relationships with their origin partners to ensure fair wages are being paid back to the farmer. However, as newer players enter the market, what options are available to build trust especially for those who can not afford to form direct trade relationships?

In Taza’s 2016 Transparency Report, Jesse shares an inquiry he started to learn what his origin partners actually paid to farmer for their raw cacao. Taza’s cacao beans are grown on over 2000 small farms in 4 countries, so personal interviews with the many farmers partners to assure fair payment could easily turn into multiple full time jobs. They decided to “trust and verify” leading Taza to update their Direct Trade Agreement to include a commitment by partners to provide documentation upon request demonstrating the compensation paid to farmers and employees. During his farm visits, he verifies with farmers were paid the price agreed upon. In the report, Jesse notes, “the solution to collecting reliable data is an imperfect one.” Taza’s Direct Trade model depends less on inspections and more on “collaboration and trusted relationships.” This model reflects a greater shift happening in many industries; a human and relationship-based approach towards tackling larger and complex system problems.

Theo Chocolate, a bean to bar chocolate company and the first maker to be organic and Fair Trade certified, similarly relies on trusted relationships with its supply chain partners on the ground. They also require receipts of price paid to farmer and visit partners regularly to verify agreements. This summer, I had the chance to meet with Santiago Paz, Director of Norandino Cooperative in Peru who has been a champion for producer rights, transparency and fair wages for the 26 cooperatives that Norandino supports nationally. He spoke highly of Joe Whinney, CEO and founder of Theo Chocolate and jokingly shared, “I teach economics to the local university, and my students are still confused by Theo’s ‘buy high, sell low’ model.” Through efficiency of production and strong company values, Theo is able to offer both a higher than average price to the farmer and partners at origin and at the same time an affordable and high-quality product to the consumer. Like many brands in the industry, Theo also desires a simple yet meaningful way to report the added value they particularly bring to both the producer and consumer.

For newer trade relationships, even with agreements in place, it is often difficult for companies to trust that fair wage and rewards will make it back to the farmer as intended. In travels to Honduras this year, I learned from cacao farmers that Shawn Askinosie, CEO of Askinosie Chocolate made an additional trip back to origin in order to hand-deliver rewards for quality. Askinosie commits profit shares to their farmers as part of their Direct Trade Program which are paid at the end of each selling cycle. This program also includes an “open book management policy” that means they share financial statements with farmers in their language and explain in person how they arrive at the profit share calculation.

While there have been giant strides taken in the industry towards transparency, trust and accountability are challenged at scale. Many smaller businesses can not afford to travel to origin to meet the farmer and to build trusted direct trade relationships. This means that most businesses processing under 6MT of cacao rely on trusted partners to ensure fairness and care makes it way throughout the supply chain. As newer players enter the supply chain and the number of variables multiply, it becomes increasingly difficult to create standards and best practices that work for everyone. When considering other forms of value, such as how to reward skill or care for a higher quality product that benefits the environment and communities, “what’s fair” including price paid is no longer a static number. What’s fair becomes a dynamic agreement created between parties that decide what works for them based on conditions, constraints and common goals.

In summary, there is a natural tension between the desire for simplicity and standardization of best practices in order to efficiently scale and the ability to respect diverse contexts and expressions. This tension sparks an ongoing exploration around how to contextualize value beyond price paid to farmer. Namely, “what price tangibly improves farmer’s lives? And how do we really know if the producer is better off as more product is produced and sold?”

No silver bullet. Three design recommendations for fairness.

Ok, so we’ve learned that no two sourcing situations are alike and one-sized solutions designed to fit neatly in a box often don’t work for everyone. So considering the millions of farmers and countless buyers looking to connect but need a way to trust one another, where do we go from here? Particularly, how do we express meaningful impact as a collective, amidst the complexity in a way that engages and connects consumers closer to the producer?

Which is best? The blue or the red pill? The light or dark side? Unfortunately, there is no ‘silver bullet’ approach. History tells us that the rebalance of power and wealth can not be achieved through single-focused or linear approaches alone, just as Jedi’s know that becoming one with the force is an integration of both the light and dark.

Creating solutions that work for everyone first require a shared understanding of the situation we wish to change, a framework for building trust and pathways for taking action. Below are three considerations for promoting fairness and building trust in the supply chain.

  • Radical transparency. Transparency and communication should be 2-way. “I want producers to look upstream and see the buyer. I want consumers to be able to look downstream and see the farmer,” is a common request I hear. Visibility of people and roles is the first step. Transparency also means making processes and decision-making transparent, including assumptions and lessons learned, so they are open to critique and feedback.
  • Design for humans not checkboxes. Trade is powered by human relationships. Placing people at the center means that each organization and collaborative group defines their own goals and criteria to measure success. Context specific plans and agreements ensure relevance. This gets complex but luckily there are great models emerging. Social finance organizations like Kiva, RSF, IDEX, and Tides to name a few are pioneering new approaches to vetting their partners and flexible frameworks to calculate impact. Rather than compare across sources, progress is tracked through narratives on how a particular situation is changing year to year.
  • Collaborative frameworks and technology. To design for both inclusion and scale, an approach needs to be replicable. When considering indicators for fair wage, what is replicable is the process or framework for which stakeholders can come to agreement around what’s fair. The process includes determining shared commitments, constraints and actions to be held accountable to in order to meet those commitments. Peer-verified or reputation-based technology solutions offer signs of hope for achieving needed accountability and traceability in a diverse and distributed trade network comprised of many stakeholders.

So what’s fair? Translating care requires a shift in focus on people and relationship. In sum, we’ve just begun to scratch the surface of how to track and show meaningful impact. The path to expanding markets is by creating more trust from farm to consumer. From here expanding the market for conscious chocolate from 5% to 10% in 5 years becomes possible. It requires a joint commitment and coordinated effort from many people working within the system to improve it. If you are interested in contributing to the design of a collective impact framework to support farmers, buyers and intermediaries working in this sector, please email nancy(at)yellow-seed.org. Share your feedback or add a comment directly to this article.