12. November 2019

A lesson in the high politics of cocoa - How a united front by exporting countries resulted in an ag

Declining agricultural commodity prices are running havoc on farmers’ ability to earn a living in countries around the world. Within liberalized commodity sectors, prices are to a large degree out of farmers’ control since they are the result of global market dynamics of supply and demand. The most prominent answer to date has been market-based mechanisms, such as premiums paid through certification systems, to achieve higher prices for farmers (often with limited success).

The past couple of months tell a slightly different story. Last week the two largest cocoa growing countries in the world – Ivory Coast and Ghana – announced that the industry agreed to pay a mandatory living income differential of $400 per ton starting next growing season.

What is behind this announcement is an interesting lesson in the politics of cocoa that challenges our assumptions about the ability of stakeholders, particularly governments, to transform the way commodities are priced and traded to the benefit of farmers.

A power struggle between the industry and governments

Globalized markets tend to pitch producers and exporting countries against each other as they are forced to compete for international buyers. Yet, in 2018 Ghana and Ivory Coast, the two primary producers of cocoa beans in the world, signed a Strategic Partnership Agreement (the Abidjan Declaration) to jointly tackle the chronic challenges in the cocoa sector.

One of the key priorities of the agreement was to ensure that farmers receive a higher price for their cocoa. A year later, the two countries made a surprise announcement: for the 2020/21 season, the two countries would set a minimum price of $2,600 per ton of cocoa plus charge buyers an extra fee of $400 per ton, which they coined the ‘living income differential’ (LID). This would allow both states to set up a stabilization fund and guarantee that 70% of the $2,600 would go directly to the farmers.

The industry was largely taken aback by the move. Government-run price setting mechanisms as levers to raise farmer incomes are generally seen as less preferable by the industry (often citing the unintended effect of oversupply) compared to raising incomes through market-based premiums or productivity enhancements. Yet, the industry didn’t openly oppose the initiative and, in fact, some companies even expressed public support.

When push came to shove things looked less straight forward. Buyers were reluctant to buy the more expensive future contracts, through which cocoa is traded. By mid-October only around 150,000 tons of 2020/21 cocoa had been sold (versus about 450,000 tons the same time in 2018).

So the governments upped the pressure. In an October 10 statement, they announced a review of cocoa buyers’ multi-million dollar sustainability programs in the countries including the possibility of halting them. This created a significant challenge for buyers who relied on these programs as primary avenue for investing in the productivity and sustainability of cocoa farming and as important branding tool vis-à-vis consumers.

Although scrutiny of the impacts of buyers’ sustainability programs on chronic issues, like deforestation or child labor, is nothing new, the threat by governments to halt them was as shrewd as problematic since it used farmers’ well-being as a bargaining chip.

In the end, the gamble paid off. After tense negotiations at the sidelines of the World Cocoa Foundation’s Partnership Meeting in Berlin last week, the governments of Ghana and Ivory Coast were able to gain the industry’s acceptance of paying the Living Income Differential (LID). They not only announced that sustainability programs and higher prices are two key pathways for farmers to earn higher incomes but also guaranteed that the $400 LID would also be passed directly to farmers.

Living income as an issue whose time has come

How did the governments of Ivory Coast and Ghana manage to get the industry to agree on their proposal for higher cocoa prices? One key factor is the unique level of bargaining power by Ghana and Ivory Coast who jointly account for around 60% of global cocoa production. This makes them not only indispensable trading partners for any large chocolate company but also frontrunner for other cocoa producing countries (similar proposals on higher prices are now developed in Nigeria, Cameroon and Peru).

Yet, the industry arguably wouldn’t have come to the table if it hadn’t been open to considering paying higher prices in the first place. Last week’s agreement is as much the result of governments forcing the hand of the industry as it is the result of a growing recognition that farmer poverty is at the root of sustainable challenges in the cocoa sector.

This recognition is no coincidence but is the result of years of civil society pressure, a growing evidence base on income gaps, the emergence of multi-stakeholder initiatives on living income, frontrunner companies endorsing the ambition of a living income, and living income becoming a mainstream position by the industry.

There is also no denying that governments simply had a good argument on their side by pointing out that buyers’ ability to invest millions in sustainability programs means they should also be able to pay fairer prices. And that a mandatory LID will reach a much larger number of farmers than voluntary price premiums within the supply chains of individual buyers.

The question on everybody’s radar now is how this new agreement will be implemented, how much of the higher prices will actually arrive at the farm gate, and who will actually benefit a household level. Effective implementation will require a high level of transparency to hold governments accountable for their commitment of transferring all of the LID to farmers. It will also require particular attention on women’s farmers role and constraints in order for higher farm gate prices to not reproduce the gender inequities that mark cocoa production today.

The best way the industry can live up to its growing commitments to living income for farmers is to use their leverage to ensure that the higher prices they agreed to pay actually are reaching cocoa farmers, particularly women.