By Julian Oram, Policy Director
If you had a little extra space and a few big houses hidden behind the couch a year ago, you could have made a pretty penny buying a box of cocoa beans and sneaking them into your basement. On Valentine’s Day 2023, a ton of cocoa fetched about $2,700 on the global market. A year later, cocoa prices have breached the $6,000 mark, with little sign of the market cooling. Not a bad return if you’re an investor.
For millions of West African farmers, however, cocoa is not a whimsical investment, nor just a business. It is a critical source of livelihood, income to support their families. In short, it’s a matter of survival.
A sweet offer for some…
Just four African countries – Ivory Coast, Ghana, Nigeria and Cameroon – account for over 70% of cocoa traded on the world market. The majority of this cocoa, which is mainly grown by smallholders, ends up in confectionery products destined for consumer markets outside Africa, sold by global conglomerates such as Mars, Mondelez (owner of Cadbury’s), Hershey, Nestlé and Ferrero .
Until last year, the prices these companies paid for the cocoa in their chocolate products (often bought through middlemen) remained flat. In the five years to early 2023, cocoa beans were trading at an average of around $2,400/tonne. This allowed chocolate manufacturers to make steady profits, with any small fluctuations in cocoa prices quickly passed on to the consumer.
Writing in Time magazine in June 2023, Alana Semuels observed that chocolate companies do not hesitate to raise prices, even when faced with small inflationary pressures:
The price of cocoa affects the price of chocolates you buy at the grocery store. Even in normal times, cocoa is one of the highest-cost ingredients. And with the inflation of the past two years, chocolatiers have not hesitated to raise prices to cover their costs. It’s something Hershey’s has already acknowledged…in April, CFO Steven Voskuil said “cocoa and sugar in particular are moving in the wrong direction,” referring to commodity prices. In early 2022, even before the invasion of Ukraine, Hershey’s raised prices for its product lines.iii
As it turns out, cocoa isn’t just a smart short-term investment for casual investors with an empty basement, it’s also been good business for a long time for the world’s biggest chocolate makers. Very good business indeed.
…Bitter inheritance for others
As for the farmers, their story is not so rosy.
The dominance of cocoa in West African economies is a legacy of colonial rule. Cacao was introduced by the British to West Africa in the 1890s, where it slowly spread and then flourished under smallholder cultivation. Cocoa was adopted by large numbers of farm families because, as an export crop, it provided a source of cash income for farm households. However, after reaching a high point in the late 1970s, cocoa prices subsequently fell dramatically and – with a few notable spikes – have remained more or less stagnant ever since.
While inflation has made farming and the cost of living more expensive for rural households in recent decades, the price farmers received for their cocoa has failed to keep pace, driving many into poverty. In 2021, researchers from Wageningen University in the Netherlands found that between a third and a half of households in Ghana and Ivory Coast earned a gross income below the World Bank’s extreme poverty line, while the vast majority (73 – 90%) earned below subsistence income.iv This means they do not have enough money to pay for basic household needs such as food, clothing, housing and medical care.
By comparison, Nestlé’s sales of chocolate products alone exceeded CHF 6.2 billion ($7 billion) in 2022.v while Hershey’s net profit margin was 16.67% as of September 30, 2023.vi
In addition to its tragic human consequences, the inability of cocoa farmers to earn an income from cocoa has also had a devastating effect on the forests of West Africa. Experts point out that the number one driver of deforestation in West Africa is poverty, as smallholders trying to make a living seek to expand their farms by pushing into forests and protected areas.vii Low profits from depressed cocoa prices also prevent farmers from investing in measures that could improve biodiversity on their farms, such as adopting agroforestry techniques.
All of the above suggests that the recent rise in cocoa prices in world markets should provide a much-needed boost to struggling cocoa farmers. Correctly?
Unfortunately not. The reasons behind the astronomical rise in global cocoa prices over the past twelve months are varied, but largely stem from a series of poor harvests from the main producing countries of West Africa. The low yields were caused by unpredictable rainfall, caused by climate change, and the outbreak of a disease that affects the roots of cocoa trees. Low yields have caused a supply shortage, fueling the recent price rally. So while so-called “farmgate” prices may eventually rise as commodity price trends pass through the market, the amount of cocoa farmers have to sell has been significantly reduced. Investors and traders may be happy, but farmers still lose.
What’s next for cocoa?
On the surface, this may all seem like just another story of grand capitalist greed: power imbalances that allow huge corporations to exploit those sitting at the bottom rung of the supply chain ladder.
And to a large extent it is. For decades chocolate companies and the trading house that supplies them with cocoa have extracted value from small farmers, paying low prices, indulging in unfair business practices and placing the burden of risk for sudden market changes on those people in the supply chain unable to withstand these risks.
But there is another side to this story, one that could play out in ways that significantly and permanently disrupt the industry. The most obvious response to the significant recent rise in cocoa prices on world markets has been an unexpected series of announcements that chocolate companies are “forced” to respond by raising consumer prices.viii, ix
But beyond that knee-jerk response (which may test an inflation-weary public’s desire to keep buying confectionery), there’s a growing sense that this episode could be a necessary catalyst for change in business approach of the chocolate industry.
While chocolate is grown in many tropical countries around the world, confectionery manufacturers still depend heavily on West African smallholder producers to meet most of their mass-produced chocolate needs. The industry is therefore faced with a stark choice: help struggling farmers cope with climate chaos or abandon them to their fate and watch their supply chain base collapse (recognizing that interventions by public agencies in Ghana and Côte d’Ivoire alone is insufficient to meet the needs of millions of cocoa-growing households).
Faced with this choice, the big chocolatiers know they have to do more. So, the question is what should be done and how?
All major cocoa buyers (traders and chocolate companies) operate various sustainability programs in West Africa. Many of these have a ‘living income’ component, while others are designed to address specific challenges, such as reducing the worst forms of child labour, improving on-farm biodiversity by distributing seedlings or tackling the overuse of agrochemicals. In terms of livelihoods, interventions include programs with names such as ‘income accelerator’, ‘payment for environmental services’ or ‘livelihood diversification’. Pretty jazzy stuff.
Unfortunately, while useful in addressing some specific needs, these programs often fail to make a dent in the daily reality of persistent poverty for cocoa farmers. Nor, in general, are they sufficient to help farmers build resilience to climate change on their farms.
This is where the opportunity for change must be seized.
Last week I attended the World Cocoa Foundation Partnerships meeting, a two-day discussion between chocolate industry figures, cocoa traders, government officials, cocoa farmers and civil society representatives on a range of critical sustainability issues, which kicked off Cocoa & Chocolate Week of Amsterdam. At these meetings, I repeatedly heard people talk about the need to provide cocoa farmers with a living income. This was not new.
What was different, however, was that for the first time, a common theme that emerged was need they pay farmers more for their cocoa, especially sustainably grown cocoa. It wasn’t just NGO people like Mighty Earth or the VOICE Network – which published an excellent paper on cocoa living incomes in November 2023 – it also came (quietly) from people in the industry itself, as well as government representatives.
The push for this also comes from the EU, which has set the clock for companies selling chocolate to European consumers to ensure that all the cocoa in those products is free from deforestation. This means that big brands need to quickly get much better at knowing who their suppliers are – right down to the farm level – and start investing in those farms by paying farmers a price linked to a living income for cocoa without deforestation and doing so through fair and transparent contracts. And if that sounds idealistic and impossible, it’s not – it’s already being done by many smaller chocolate companies around the world.
The future of the industry hangs in the balance, but with bold and innovative new approaches that properly value both farmers and sustainability within their core business models and purchasing strategies, the major chocolate companies could help chart a course for a cocoa sector that is climate resilient, environmentally friendly, ethically responsible and produces benefits for the many, rather than the few.