How the world chocolate market nearly ate itself
The port town of San Pedro is an archipelago of fenced-off warehouses separated by wide expanses of red dirt and wild vegetation. At the end of the dry season it is washed with dust stirred up by the wind coming off the Atlantic, its provincial calm belying its huge significance as the heart of Côte d’Ivoire’s cocoa trade.
Close to 20% of the world’s cocoa crop passes through San Pedro on the way to Europe and Asia, and the smell of roasting beans hangs on the processing facilities close to the sea front. Across the region, dirt tracks wind out of the bush to link up with the main trunk roads — themselves battered and cracked from decades of neglect — used by the middlemen that link hundreds of thousands of smallholder farmers to world markets.
The global chocolate market has always leant heavily on West African farmers. In Côte d’Ivoire, which produces 40% of global cocoa supply, 3.6m smallholders feed the industry. In Ghana, which accounts for a further 20%, 3.2m farmers work at the beginning of the supply chain. It is a structure that has served retailers and processors well, but which is now creaking.
Fuelled by an economic recovery in Europe and growing markets in Asia, cocoa demand is outpacing supply, with major manufacturers forecasting a 100,000–120,000 tonne per year shortfall by 2020. West African smallholders’ productivity is not growing in step, bringing into focus decades of underinvestment in the economic, social and environmental underpinnings of the supply chain. The chocolate industry’s attempts to mitigate a looming shortage could mean hundreds of millions of dollars flooding into West Africa — and even lead to the restructuring of an industry where less than 6% of the value of the finished product reaches farmers.
“What’s clear today is that if we’re operating in emerging economies, particularly in cocoa, we have to understand more about the supply chain,” says Gerald Manley, who heads the cocoa business of Olam, the world’s largest originator and trader of the crop. “We have to invest more in the supply chain.”
The convergent economic, environmental and social pressures facing the cocoa industry are not unique, but the structure of the supply chain is such that it is more vulnerable than any other.
Cocoa, unlike most major cash crops, is almost exclusively a smallholder business. Around 14m farmers work in the supply chain — 10m of them in West Africa. They face the same challenges of smallholders worldwide, struggling to move beyond near-subsistence levels without access to finance for inputs and training. In cocoa, these problems are particularly acute due to the timescales over which trees reach maturity.
Cacao trees take around five years to reach peak productivity. They continue to produce for around a decade, then begin to decline. This means that cocoa is a business that requires long-term planning, but tight economic conditions tend to drive farmers towards making short-term decisions. In an environment of low and uncertain incomes, few farmers in West Africa have systematically invested in replanting.
Lower yields also mean less income, further undermining farmers’ capacity to reinvest in inputs, locking them into a vicious cycle of underinvestment and low productivity. This has been exacerbated by volatile, and often low prices, and smallholders’ dependence on middlemen. Remote as they are and without much negotiating power, farmers have been trapped in an often exploitative bargain with traders who are able to drive down prices.
These traders have held sway since the liberalisation of the cocoa business under the structural adjustment policies advocated by the Bretton Woods institutions in the 1980s and 1990s. In Côte d’Ivoire, the state-owned Caisse de Stabilisation, or Caistab, was dismantled in 1999, ending the government’s influence on prices and leaving farmers to the vagaries of the international markets.
“Once [the sector] was liberalised, all of these bodies were dismantled, it became privatised. These were taken over by traders, and you can imagine the havoc that was created. There was a vacuum,” says Loke Fong Han, senior economist at the International Cocoa Organisation (ICCO).
Unlike the state-owned bodies, which in theory invested in extension services as well as in buying and marketing the crop, traders saw little incentive to invest in the productivity of farmers or to offer competitive prices.
“What’s happening today is a result of that,” Han says. “The farmers don’t get the services that were supposed to be delivered by the bodies that were abolished.”
It is not just the trees that are ageing. With incomes stagnant or falling, younger farmers are abandoning the crop, or leaving farming altogether. The average age of cocoa farmers across the region is now over 50, according to the Fairtrade Foundation.
Labour woes
“There’s a very basic labour problem across West Africa,” says Adrian Simpson, CEO of Tropical Farms, which runs a cocoa plantation in Sierra Leone. “I remember a conference a couple of years ago in Abidjan, the Ghanaian young farmer of the year was 42.”
Sierra Leone, which produces a small fraction of the global cocoa supply, is “a microcosm” of this problem, Simpson says. The cocoa-producing region, along the border with Liberia and Guinea, was hit badly during the country’s civil war, and never fully recovered.
“A lot of the youth left the area and settled elsewhere. The older members of the family are getting on now. We’ve probably got one of the lowest productivities per hectare… in West Africa.”
Almost all of West Africa’s cocoa is rain-fed, making it exceptionally vulnerable to changing weather conditions. Already this year an unusually harsh Harmattan — the dry trade wind that blows down from the Sahara — has reduced yields, with some traders predicting a 10–15% fall in output in Côte d’Ivoire and Ghana.
As Olam’s Manley says: “We haven’t had an El Niño event in cocoa and obviously it’s something that the weather watchers and ourselves take a great interest in. That could cause a price disruption.”
This vulnerability is only going to worsen, as climate change affects once-predictable patterns of rainfall. The region has experienced a greater incidence of extreme weather events over the past decade, undermining the viability of cash and food crops. As most smallholders depend on their own production of staples to feed themselves and their families, the sustainability of cocoa is bound up in the sustainability of the entire agriculture sector.
At the Copagra coffee and cocoa cooperative outside of Issia in southwest Côte d’Ivoire, elder Brahmia Wermi says that climate change is already presenting problems.
“Before, there was never a problem with rainfall,” he says. “Now, we often don’t have rain at production time, which ruins everything.”
The combined challenges to farmers have begun to hit home, leading the chocolate industry to reassess the structure of their supply chain.
“They buy the cocoa, ship it, and all of the investment is downstream in production and marketing. The last thing they’ve needed up to now is actually investing in growing cocoa,” Tropical Farms’ Simpson says. “They’ve kept the growing of cocoa at arm’s length. Now, the reality is beginning to hit home. They need more trees in the ground.”
The upside
In Koffiro, a village a few miles down a roller-coaster dirt track off the main road out of Yamoussoukro, fermented cocoa beans dry in a greenhouse. Around 500 farmers from the surrounding area operate in a cooperative that sells cocoa into the national market, and the village, relatively remote and hard to access by truck, is typical of the kind of communities at the wide end of the supply chain.
However, unlike many other villages in the region, Koffiro is now mainly made up of concrete and brick houses, which have replaced traditional wooden structures. More bricks are drying in the sun behind a large new schoolhouse, built with the proceeds of cocoa sales.
Koffiro is on the frontline of the chocolate industry’s attempts to solve its supply crisis. A programme run by Olam, Hershey’s and Fairtrade USA is working with the cooperative to train farmers in better techniques for growing, harvesting and processing their cocoa crop. Fairtrade certification attracts a premium price per tonne and an annual bonus, paid to the community as a whole.
Regulation plays its part too. In 2012, the newly-elected government of Côte d’Ivoire introduced several major agricultural reforms, creating a new institution, the Conseil du Café-Cacao (CCC), to oversee the coffee and cocoa sectors. The CCC now sets cocoa prices, reversing the liberalisation of the late 1990s and restoring a degree of stability to the market. The price — CFA 850 ($1.40) per kg — is pinned to the doors and walls of cooperative warehouses around the country. Buyers are allowed to pay a premium to farmers who have attained international certification.
“The quality is better, the yield is better. And we get what comes after,” says local farmer Mathias Kwaku Konan — meaning more income.
West Africa’s systemic low yields mean that it is best placed to take up the slack in the global cocoa supply, and it is farmers like Konan who should benefit.
“Cocoa yields haven’t increased in the last 60 years. We’re still seeing 500kg, 600kg per hectare,” says Olam’s Manley. “Clearly, you’ve got to change productivity. We’re aiming for 1,000kg per hectare. Quite honestly, we do believe with the right fertiliser and management, you can get that to 1,500kg per hectare.”
Manley sits on the board of the World Cocoa Foundation, under whose auspices the world’s largest chocolate companies came together to launch Cocoa Action — a platform through which they committed to share knowledge on the sustainability of cocoa farming, and to invest $1bn in social and economic infrastructure to support smallholders.
The initiative has attracted a degree of cynicism from within the industry. One senior executive at a member company says that Cocoa Action is a way for the chocolate producers to pass on costs to their intermediaries, mitigating their long-term sustainability issues without having to charge consumers more. Another, at a major supplier, calls it ‘PR’.
At the ICCO, Han is more forgiving. “The process has started, but you need to get these stakeholders to buy into the so-called sustainability model,” he says. “It will take some time.”
In the long term, Han says, the focus needs to be on “changing the paradigm” at the world’s largest consumers of cocoa.
“We need to show them that they need to be inclusive businesses. You rely on the supplies from the farmers; the farmers are actually partners in your big corporation.
“Not just your corporation… you have to see the farmers as part of the wider picture, as your shareholders,” he says.
“We’re trying to inculcate this into the business side… This is more pertinent now because of this fear that you need a regular supply of the cocoa beans to run your chocolate factory. That’s what we’re trying to tell them: ‘Your business relies on the farmers as well, as much as they rely on you’.”
That ideal does seem a long way off, given the sheer scale of the world’s confectionery companies.
Mars alone has annual revenues of more than $17.5bn; the top-10 chocolate makers have combined annual earnings of close to $90bn, making the $1bn dedicated to cocoa action a drop in the ocean.
“If you go to a very big global chocolate company and say that smallholders should be part of the board of management, they will laugh at you,” says Alejandro Litovsky, the chief executive of the Earth Security Group, which recently compiled a report of major environmental, social and governance risks to global supply chains — including the cocoa industry’s looming crisis.
He believes that a model that is led by corporate social responsibility may not be enough to address the fundamental challenges to the industry.
“Nestlé talks a lot about shared value, Mars talks about increasing payments to smallholders. But how do you move beyond that?” Litovsky says. “We can’t keep thinking about supply chains as business as usual. The transition needs to come from a business model innovation.”
For the countries and the farmers at the far end of the chain, however, a simple equation means that the chocolate industry’s challenge should be West Africa’s opportunity: greater productivity means more income. Around 30% of Côte d’Ivoire’s exports, 17% of Ghana’s and 12% of Cameroon’s are cocoa-related.
Spurred in part by government initiatives and in part by the changing needs of chocolate makers, investments in processing are also coming to West Africa. Currently, only 30% of Côte d’Ivoire’s cocoa is processed locally; in March, Olam inaugurated a $75m, facility, capable of turning 75,000 tonnes of cocoa into butter and liquor per year.
In May, the French chocolatier Cemoi will open Abidjan’s first chocolate factory, attracted by Côte d’Ivoire’s economic growth and the expansion of its middle class. The company has been invested in the country for decades, and already has a 70,000-tonne grinding operation in the commercial capital.
“When we started this [grinding] factory in ’96 in Abidjan, there was a car park, and it was totally empty. Now the car park is totally full, because all the middle management have cars,” Patrick Poirrier, Cemoi’s CEO, says.
Cocoa culture in Côte d’Ivoire is changing, he believes, driven by an industry-wide appreciation that investment in sustainability is the only way to safeguard quality.
“We are chocolate makers, we are not traders,” Poirrier says. “When we buy cocoa, it’s to make chocolate. It’s difficult to make good chocolate if you don’t have the right cocoa.”
