Amanda Fernandez | Palladium - Feb 14 2020
The Cocoa House is on Fire - Can We Wake Up and Change?

Source: Peru Cacao Alliance

In a desperate and laudable attempt to address cocoa farmer poverty, the governments of powerhouse cocoa producers Ghana and Côte d’Ivoire (collectively responsible for more than 60% of the world’s cocoa) recently introduced the living income differential (LID) – essentially using their market power to require an additional USD 400 above the market price per ton of cocoa sold.

Most cocoa farmers live below the poverty level and even lose money growing the crop, according to the 2018 Cocoa Barometer report and research by Palladium. While higher prices will help, no price-fixing strategy will change the fact that the chain is structurally failing farmers, West African children, and the environment.

The LID is estimated to bring USD 1.4 billion in extra income to the two countries for their 3 million tons of cocoa, but it does so in a way that places the cost (and the blame) squarely on the chocolate companies, when the reality is far more complex.

The current system isn’t working for anyone, and we are all failing the cocoa farmers. Governments provide the wrong kinds of subsidies that don’t achieve their intended impact. Sustainability programs are unambitious and achieve little impact in bringing farmers out of poverty. Financial institutions ignore the market opportunity, and impact funds can’t find cocoa actors to invest in. Certifying programs and agents serve more to increase costs for the poorest actors than to ensure improved prices to farmers, traceable product, or reductions in child labour. Worse still, certifications now serve as yet another barrier (and cost) to accessing financing and investment by all supply chain actors.

The problems of the global cocoa supply chain are well understood. Despite existing technology and knowledge – and regardless of whether you are in Colombia or Ghana – it is characterised by small farms, elderly farmers, old and unproductive trees, not enough technical assistance, limited mechanisation, no financing, and resulting abysmal yields.

To grow more cocoa, farmers cut down forests and use child labour.

Clearly the cocoa sector needs a radical overhaul, and the chocolate companies need larger farms, higher yields per hectare and a lot more, better quality cacao. But at a cost of anywhere from USD 5,000-7,500 just to renovate one hectare of cocoa (not to mention organising the collecting, processing, and transportation), who will write the USD 600 million check needed to renovate one country’s 100,000 hectares of cocoa? The problems of the cocoa sector have now grown so big, no one actor can tackle them alone.

If we want both forests and chocolate in 20 years, we need take Greta Thunberg’s lead and “start acting like the house is on fire.”

"The current system isn't working for anyone, and we are all failing the cocoa farmers."

Lessons from Peru

Palladium took on this daunting challenge in Peru, when we approached cocoa traders, chocolate companies, government representatives, dozens of cocoa supply chain actors, and hundreds of communities throughout Peru’s Amazon region to get them to admit we needed change. USAID Peru – desperate for new solutions to effectively combat illegal coca production – took a chance on our idea, and provided a critical seed investment of USD 36 million to create the Peru Cacao Alliance, along with a mandate of leveraging at least the same amount in investment from alliance partners, to collectively change the cocoa market and bring farmers out of poverty.

To ground our solutions, we defined a set of core principles that guided us to collectively reimagine the cocoa sector:

  • If farmers do better, we all will do better
  • There are no handouts – only opportunities to invest in something bigger, better, and more profitable
  • Larger farms that generate five to 10 times more value in an agroforestry model (without deforestation)
  • Long-term direct relationships between end buyers and producers, with intermediary supply chain managers building a transparent bridge between them
  • Organisational models that can achieve large scale
  • A next generation of aggregation agents (supply chain managers) investing in improved post-harvest management and farmer services to meet market requirements
  • Financial actors mobilised to release the necessary financing where and when it is needed

An all-Peruvian team translated these core principles into action. Change wasn’t easy. Entrenched actors and detractors of these radical ideas howled, and more than a few alliance members came and went. But between 2012 and 2016, the alliance’s perseverance paid off.

The farmers in the Peru Cacao Alliance successfully co-invested in planting 28,000 hectares of cocoa in an intensive agroforestry design, and Peru moved from tenth in the world to second in fine flavour cocoa production. The cocoa industry took note that change was possible.

According to Dr. Jose Iturrios Padilla, Director of the Peru Cacao Alliance, cacao farming in the Amazon is inextricably linked to environmental protection.

“If we can improve yields and incomes among alliance farmers, we will keep them from cutting down more trees,” he explains.

The Peru Cacao Alliance has so far achieved a 24% increase in income among 20,000 farmers. Source: Peru Cacao Alliance
The Peru Cacao Alliance has so far achieved a 24% increase in income among 20,000 farmers. Source: Peru Cacao Alliance

And how did cocoa farmers fare? USAID Peru provided a second round of investment (USD 25 million) in 2016 to the Peru Cacao Alliance (matched with USD 53 million in private sector commitments), that through 2019 has led to concrete and measurable impact for cocoa farming families, including:

  • Income increases among 20,000 farmers of 24%
  • Revenues from cacao sales increased by 60%
  • Reductions in the percentage of cocoa farmers living in poverty from 42% to 38%
  • Increased sales value per hectare of 25%, achieving USD 1,046 in sales per hectare
  • Average area harvested increased by 29%, while avoiding deforestation
  • Farmers making an average of USD 6,252 annually, with a larger percentage of their income generated from cocoa
  • 20,000 farming families producing cacao on an average of 2.9 hectares per family
  • Farmers achieving average yields of 691 kilograms per hectare
  • 72% increase in the number farming families using fertilizer on their crops to improve yields

Walking the Walk

Palladium’s inclusive growth approach piloted in Peru for the cocoa sector is proof of concept that solutions, while not cheap nor quick, do exist to reimagine and revolutionise supply chains in ways that benefit industry, government, and farmers, while “walking the walk” of sustainability. Inclusive growth strategies need not be limited to cocoa; Palladium has crafted similar solutions for corporate entities in dozens of countries to revolutionise workforce systems, financial sectors, and supply chains of apples, coffee, maize, rice, and soy, among others.

While the world searches for elusive “silver bullets” to bring poor cocoa farmers out of poverty, we have found a recipe that works. Effective change takes a dedicated buyer, time, money, principles, and resourced collaboration. To once again quote Greta Thunberg, “We have the facts and solutions. All we have to do is wake up and change.”

Amanda Fernandez is a Director of Economic Growth at Palladium, and former Project Director of the Peru Cacao Alliance.

Click here to view an infographic of the positive impact of the Peru Cacao Alliance, 2016-2019.

Read more about Palladium's inclusive growth work in our Harvard Business School Working Paper, and contact to learn more.