CSR and Sustainability, Government, Human Rights, Smallholders, Stakeholders, Supply Chain

How to deliver real sustainability in the cocoa sector: Collaborative development governance

The cocoa sector is once again in the news, for all the wrong reasons. If price premiums are not the long-term answer, then what else might deliver the needed sustainability change?

Dr Peter Stanbury-Davis and Tobias Webb write that the the solution is to think bigger, and admit the industry itself needs serious reform on the ground

Can cocoa ever be sustainable? Recent media coverage of the industry paints a bleak picture. Much of that has focussed on farmers apparently being paid significantly less than a dollar a day for cocoa beans. It has also highlighted continued allegations that cocoa farming is a contributor to deforestation in producing countries. All of this strongly suggests that efforts by cocoa traders and chocolate companies, and the use of procurement standards have failed meaningfully to shift the dial on the sustainability of the industry. This is not surprising, however, given the challenge of fixing cocoa is actually to help the reform of the structure and governance of the economies of West Africa. This is an area fraught with difficulty. Yet that does not mean commodity sourcing practices cannot assist in this area. They can, and must. This article starts to explore exactly how that can happen.

Three inter-related problems

The ‘noise’ about the cocoa sector has been significant, and the issues are complex. However, the challenges can essentially be boiled down to three key questions:

  • The Governments of Cote d’Ivoire and Ghana have recently introduced a price premium intended to address low farmer incomes. Are these approaches workable?
  • Whether or not they can be made to work, do price premiums really address the core sustainability challenges faced by the cocoa sector?
  • How might traders and manufacturers genuinely operate sustainably, and what is the role of performance standards in this?

This article explores each of these questions, and draws some conclusions about how all actors might proceed in order that the chocolate which consumers so enjoy can be produced in a way which is sustainable both socially and environmentally.

Poverty in the cocoa sector in West Africa

On the face of it, it is hard to argue with the logic both of the Governments of Cote d-Ivoire and Ghana, and of the Fairtrade Foundation that the amount paid to cocoa farmers for their crop is too low. There is some dispute about the exact number, however the recent Cocoa Barometer report calculated that on average an African cocoa farmer earns $0.78 a day. If this is true, then cocoa farmers’ incomes are well below the poverty line.

The solution currently proposed to this problem is that cocoa buyers should pay a price premium to improve farmers’ incomes. As was recently reported by Reuters, the Governments of Cote d’Ivoire and Ghana have this month introduced a ‘Living Income Differential’ (LID) of $400 per tonne, aimed at addressing farmer poverty. The Fairtrade Foundation also announced as part of its focus on ‘a living income’ that as of October 2019, the ‘additional Fairtrade Premium (the additional price paid to farmers who are Fairtrade compliant) will be increased from $200 to $240 per metric tonne’.

But are farmers actually as poorly paid as is implied by the figure of $0.78 per day? As is the case for most small-scale farmers in sub-Saharan Africa, cocoa farm households have a number of income streams – both on-farm and off-farm – both to increase and diversify their incomes. Thus, it is not showing the complete picture of households’ relative poverty by focussing only on their income from cocoa.

According to a recent study by the Dutch Royal Tropical Institute when other income-generating activities are taken into account, the per capita income of cocoa farm households in Ghana and Cote d’Ivoire is about $3.00 per day. This study further concluded that ‘cocoa households do not suffer from a higher incidence of poverty than non-cocoa farmers. … This suggests that poverty is more a ‘rural smallholder’ phenomenon, rather than a ‘cocoa farmer’ phenomenon.’

Are price premiums the way to address sustainability in cocoa?

Nevertheless, even if cocoa farmers are not quite so poor as implied by the host governments and campaigners, it is still desirable to increase incomes further. Are price premiums the way to do this? There are a number of challenges to address if these premiums are to be effective.

A significant challenge is the mechanism by which the additional funds are intended to benefit farmers. As reported in Africa News the Governments intend that the LID will work as follows: ‘funds raised … will be used to help increase payments to farmers…If market prices rise above $2,900, proceeds from the LID will be placed in a stabilisation fund that would aim to ensure the governments can pay farmers …the target price when market prices fall’.

The effectiveness of the LID in improving farmers’ incomes therefore relies on the effectiveness of state structures in the two host countries: this seems likely to be a challenge. Although both countries fare reasonably well on measures of corruption – Ghana and Cote d’Ivoire are rated respectively 78th and 105th out of 180 countries surveyed in Transparency International’s Corruption Perception Index – they do less well on measures of governance. The World Economic Forum Competitiveness Report puts Ghana at 111th place of 141, and Cote d’Ivoire at 118th. The World Bank Doing Business Indicators paint a similar picture with Ghana at 114th of the 190 countries included; Cote d’Ivoire does even worse, in 122nd place.

These analyses raise significant questions about the practical impact on farmers of the LID: simply put, how can the bureaucratic challenges these countries face be managed so that the additional money from the LID finds its way to farmers’ pockets.

A particular challenge lies in the lack of information given about how the ‘stabilisation fund’ will work. For this to be effective as a mechanism to protect farmers in years when the cocoa price is low surpluses from high-price years needs to be ringfenced. Greater clarity is needed as to how this will be achieved.

If the aim is to increase farmers’ incomes, then it would also seem relevant to look also at distribution of cocoa revenues now. Of the price per tonne paid by international buyers, only around 60-70% of this actually makes its way to farmers. It is not clear how the remaining 30-40% of the revenues are used: it is likely that they simply form part of the governments’ overall incomes.

If farmers’ incomes are to be improved, a good starting point would be to work with host governments to establish how at least some of this retained income might be used to that effect.

What then of the additional living income premium proposed by The Fairtrade Foundation? Will this really help the lives of ordinary farming families? Here the challenge relates to Fairtrade’s focus on working with farm cooperatives. This focus presupposes that cooperatives are genuinely open to all, and run transparently, presumptions which are challenged by experience of business membership organisations (BMOs) in many parts of sub-Saharan Africa. First of all, membership of a cooperative will not necessarily be open to all farmers in a district. Ethnic and religious issues, local politics and personal rivalries often mean that certain groups of farmers might be excluded from membership of a cooperative. In the case of cocoa cooperatives, this situation would already create a situation of haves (those in the cooperative who have access to the benefits provided by the Fairtrade Premium), and the have nots. Furthermore, cooperatives may not always be run in line with the interests of all their members, but instead for the benefit of a select few. As a study of business membership organisations in Nigeria observed, ‘governance in the majority of BMOs is weak. This creates a disconnect between the BMO and its members, and opens up the BMO to elite capture.’

The introduction of the LID at the same time as the increase in the Fairtrade Premium raises a further challenge: that buyers might simply go elsewhere for their cocoa beans. Cote d’Ivoire and Ghana produce 60% of the world’s cocoa, but there are other exporting countries. Traders buying Fairtrade-certified beans who will potentially hit with two price rises might be particularly inclined to look elsewhere for their supply.

In short therefore, price premiums could be made to work, but only by paying much greater attention to how the monies are used and distributed. On its own, a price premium means little in the way of improved farmer incomes: work is needed on the governance issues surround this.

Do price premiums address sustainability in cocoa?

If price premiums can be made to work, then will this solve the problem of sustainability of the cocoa sector? Wider evidence suggests not: the cocoa industry in West Africa is unsustainable in ways which will not be addressed simply by price increases. Indeed, in some ways price premiums may actually compromise some aspects of the product’s sustainability.

Recent research by the Overseas Development Institute suggests that even in the most basic definition of sustainability, the cocoa industry in West Africa is under threat. The ODI found that despite the fact that that 20% of the population in Ghana is aged 15–24, of whom 27% are not in education or work, young people are still not choosing to become cocoa farmers. As a result, the ‘average cocoa farmer in Ghana is over 50 years old – an advanced age in a country where the average life expectancy is just 62 years.’

Higher incomes to farmers – as intended by the LID and Fairtrade Premium – may well encourage more young people to stay in, or return to the cocoa sector. However, it is hard to see how this would affect the core factors which drive the social and environmental sustainability of the market.

This is because evidence suggests that the core model of cocoa production in West Africa is fundamentally flawed. At present, production comes predominantly from smallholder farmers, whose plots – typically around 2-3 hectares in size – are too small to be commercially viable. As an analysis in the Financial Times put it, ‘too many farmers produce a small amount of cocoa, and too few farmers produce it in market-efficient quantities.’

A knock-on effect of this is a lack of investment by farmers, as is demonstrated by the age profile of the cocoa trees in Ghana. According to the Ghanaian Cocoa Board, almost 25% of cocoa trees are now around 30 years old and their productivity is declining sharply. Given that cocoa trees take 5 years to produce any fruit, and not reach maximum yields until they are 10-15 years old, a lack of investment in new trees threatens productivity.

Furthermore, there appear to be significant challenges around farming methods. Another report by the ODIdemonstrates that to increase production farmers tend to increase the land they use rather than improve productivity – ‘given the option, farmers prefer to expand their planted area rather than invest in productivity on existing farms.’

At this point it is clear that, however well-intentioned, price premiums might actually compromise sustainability, not enhance it. According to a recent press release by the World Bank, in Ghana ‘forest degradation and deforestation are driven primarily by cocoa farm expansion.’ If the promise of higher prices drives increased production of cocoa in Ghana, the tendency of farmers to increase the land they farm rather than improve productivity risks driving further deforestation.

The context in which farmers exist make it difficult for these challenges to be addressed. As the ODI report observes, ‘land rights and credit markets represent a barrier to investments in productivity improvement… new plantings are a means of establishing land ownership [and] credit is expensive…’ As is the case in much of Africa, land tenure is informal and governed by traditional structures, not formally and legally registered. Moreover, borrowing is expensive – typically 20% or so – and loan structures are not usually suited to the periodic nature of farmers’ incomes.

Although price premiums may well help ameliorate some of the farmers’ challenges to some degree, it is not clear how this approach alone will fundamentally address the sustainability of cocoa in West Africa. Even if farmers are better remunerated for their cocoa, farm size and cultivation techniques will not necessarily improve. For cocoa to be sustainable, a more ‘root and branch’ change is necessary.

Do standards help?

The chocolate industry currently faces something of a quandary when it comes to the use of ethical sourcing standards. At the consumer end, a survey by Bakery and Snacks magazine observed that, ‘many consumers struggle to tell the difference between cocoa certification program labels like Fairtrade and company own labels, such as Nestlé’s Cocoa Plan, but all agree social responsibility should be a priority for chocolate makers.’

There are also challenges also at the producer end. Perceived reluctance by cocoa buyers to pay the LID poses a further problem for the sector. Early in October, Reuters reported a veiled threat from the governments of Cote d’Ivoire and Ghana towards the cocoa companies: ‘The (chocolate) brands are focusing on their sustainability programmes at the expense of the LID. The two countries (are) therefore re-examining all sustainability and certification programmes for the 2019/20 season.’

How should companies proceed? How might they respond both to consumers’ need for sustainable chocolate, and to respond to the concerns of national governments? Maybe the answer can be found in the priorities expressed by the country governments.

To use Ghana as an example, the country has in recent years acceded to Lower Middle-Income status. However, this has not been on back of broad-based economic development. According to the World Bank, despite strong GDP growth in Ghana as a whole, ‘poverty has become concentrated in rural areas and the North, with one out of three poor people living in rural areas.’

As the Ghanaian Government’s Shared Growth and Development Agenda makes clear, the answer to addressing rural poverty lies not in premium pricing models, but on fundamental changes to the structure of the cocoa sector.

As well as ‘…adoption of high yield crops, improved seedlings, use of pesticides and spraying technologies, and improved mechanisation’, the Government wants to focus on developments such as ‘strengthening collaboration between public and private sector institutions to promote agri-processing’, and improvement in road and rail infrastructure. Increased use of mechanisation and improved irrigation are also seen as key steps.

Existing procurement standards undoubtedly do a great deal to help. The Nestle Cocoa Plan, for example, is a sophisticated approach which encompasses teaching farmers modern best practices, improving cocoa tree varieties, and encouraging further diversifications by farming households.

Whatever criticisms might be made of The Fairtrade Foundation’s focus on farmer co-operatives, their work has contributed well-documented benefits to rural communities in Cote’ d’Ivoire and Ghana.

From sticking plaster to sustainable change

However valuable existing initiatives are, and however well-intentioned certification and price premiums might be, they are sticking plasters on a much larger problem.

Genuine sustainability – in terms of environmental impact, of farmer incomes and durability of supply – appears to lie, not just in helping improve the status quo, but to help effect a move to a new structure in the cocoa industry.

Companies in the cocoa supply chain, host governments and NGOs need to collaborate to make this shift happen, so that the environmental and social issues of the cocoa sector can be addressed in a holistic fashion. This will include a number of steps.

For example, productivity needs to be improved so that levels of supply can be increased without increasing the land used by cocoa, and thus reducing deforestation risks. However, improved productivity will also improve farmer incomes, and the greater use of mechanisation can, over time lead to a gradual shift in the structure of cocoa farming away from the smallholder model towards a more commercial approach.

Increased agricultural revenues can then form the basis for the development of other farming and non-farming industries to provide employment and wealth-creation. Real sustainability in cocoa is not going to be achieved by quick fixes such as price premiums, however well-intentioned. Sustainability will only be achieved by longer-term collaborative approaches between companies and governments to effect structural changes in the sector over time.

The basis for such an approach already exists. Launched in 2017, the Cocoa and Forests Initiative brings together the governments of Cote d’Ivoire, Ghana and Colombia with ‘thirty-three company signatories, accounting for about 85% of global cocoa usage’. Although focussed primarily on reducing the deforestation risks posed by cocoa, this initiative recognises the strong impact that social issues have on the environmental ones. The CFI would need to be broadened to focus equally on social as well as environmental factors. However, were it to do so, it could provide a very solid platform for addressing the deeper challenges underlying the issues of poverty, low productivity and environmental degradation.

Doing this would be complicated and challenging, but possible. Early steps could include, for example, gradually aligning work that companies are doing with farmers with government programmes of agricultural development. There might also be cooperation on addressing other constraints to the sector, for example the road infrastructure around farming villages. Over time increased cooperation could lead to a collaborative process to achieve a fundamental modernisation of the sector.

Such an approach would be highly novel, but potentially ground-breaking. Could cocoa be the start of genuinely joined-up way of addressing development issues: what one might term collaborative development governance? This may sound like an overly-academic term, but the foundations have already been laid, partly by business, to quickly turn the idea into real, scalable progress.  Simply put, it is our best shot at achieving that ultimate goal, a sustainable cocoa industry in West Africa.

 

Dr Peter Stanbury-Davis is Principal of The Frontier Practice (www.TheFrontierPractice.com) . He is an international development expert, with a particular focus on economic development of rural communities, and on linking local agriculture markets to national and international supply chains. He has recently completed a major evaluation of a project in Bangladesh which works with the highly-vulnerable ‘Chars’ communities in the north of the country. He also worked with the Government of Bangladesh to engage with large local and international companies to develop sustainable supply chains in products including maize, vegetables and fish. He has advised the World Bank on leveraging large-scale investments in fragile states so that they provide jobs and income to local people, with a particular focus on West Africa.

He also has significant experience in advising on turning around the performance of vulnerable economies and communities. Recently, he led a project to understand how best to generate economic development in Zimbabwe following the end of the Mugabe regime, focusing specifically on the use of industrial and agricultural clusters. He also developed the post-Ebola economic development strategy for Sierra Leone.  https://thefrontierpractice.com/

Tobias Webb is founder of Innovation Forum, a business conferences, and publishing company based in London. Innovation Forum focuses on tackling the most difficult supply chain issues faced by business around the world. It hosts the annual sustainable landscapes and commodities forum each year in London, the next iteration of which takes place on November 20-21. He also co-authored the UK’s Responsible Business policy (2008), has spent 10 years teaching sustainable business at Birkbeck College, University of London and Kings College London, and advised many companies on sustainability as a ‘critical friend’ and consultant. He blogs at www.sustainablesmartbusiness.com and Innovation Forum’s (free) main website, with many podcasts and articles on sustainable supply chain issues, can be found at www.innovationforum.co.uk.

 

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