Eduardo Tugendhat | Ethical Corporation - Nov 05 2018
Why Deforestation-Free Cocoa and Palm Oil are So Elusive

Eduardo Tugendhat, Director of Thought Leadership at Palladium, says sustainable supply chains can only be achieved if farm and rural worker households have a clear pathway out of poverty.

Food companies have made bold public commitments to “sustainable” sourcing of their raw material inputs such as cocoa and palm oil, commodities that are closely linked to deforestation. However, achieving this admirable goal at scale has proven to be extraordinarily challenging. For example, Barry Callebaut, the world’s largest chocolate maker, promises that “by 2025 we will have 100% sustainable ingredients in all our products”. So far, the company considers 36% of cocoa and 30% of other ingredients to be sourced sustainably, but given the approach used by certifiers and the continued extreme poverty of most producers, how much of this is really sustainable might be questionable.

Unilever also promises “100% traceability for all the crude palm oil and derivatives by 2019”. Traceability is being achieved as far back as the refineries and large plantations, but efforts to achieve traceability and certification back to smallholders is still in a pilot phase.

Smallholder farmers are the Achilles’ heel of sustainability efforts in cocoa and palm oil supply chains. It is estimated that over 90% of the world’s cocoa comes from micro scale farmers in extreme poverty with an average of less than one hectare of old trees and very low yields. It would take at least three to five hectares, at double the current yields, and at higher prices based on better quality for families to make a living income from cocoa.

In the case of palm oil, the Roundtable on Responsible Palm Oil (RSPO) estimates that over three million smallholders, defined as having less than 50 hectares, produce 40% of the world supply. Only 3.5% have been certified by RSPO. The problem is that while the cost of certification is high, there is rarely any price premium for farmers.

While pressure from large brands forces large producing companies to certify, there is no compelling reason for smallholders to do so since there seem to be plenty of buyers willing to purchase uncertified oil. Furthermore, RSPO only certifies that there is no forest destruction; it does not indicate that the smallholders are economically sustainable. Since it takes at least 10 highly productive hectares for a family to make a living income, those with less very rationally want to clear more land to support their families.

Major food companies have increasingly recognized the need to focus on this smallholder problem and have dedicated major resources to a combination of sustainability programs and certifications. For example, Mondelez’s Cocoa Life, Mars Inc’s Cocoa for Generations, Cargill’s Cocoa Promise, and Barry Callebaut’s Forever Chocolate are just some of the programmes channelling over $1bn into smallholder sustainability. The problem is that it is not at all clear these initiatives will succeed primarily because they fail to bring the farm families out of poverty.

The focus of most programmes is on training in good agricultural practices and renovation of old trees. However, 60-year-old farmers in Ghana with one hectare of land cannot afford to cut down part of their old trees to plant new trees and then wait three to four years for them to produce. They also lack the money to pay for fertilisers, or the irrigation needed to really improve yields and cope with climate change. Very few programmes are dealing with the fundamental structural issues—helping farmers increase farm size as well as yields, while also facilitating access to the necessary financing.

Meanwhile, certifications might make consumers feel better but are hardly addressing the underlying issue of farmer poverty. While the consumer pays a premium for the certified product, very little of this gets to the farmer. For example, UTZ certifications cost $10 per metric ton and in 2017 generated an average premium of about $110 per ton, of which 55% went to the farmer organization and 45% to the farmer. For a Cote d’Ivoire farmer earning the equivalent of 80 cents per day, the estimated 16% increase in income gets them to 92 cents – hardly a “sustainable” level.

In Peru, Palladium manages the Peru Cocoa Alliance, a public-private partnership that works to strengthen the fine-flavour cocoa market system, raise incomes for poor farmers, stimulate private sector investment and incentivize better agricultural practices. During a recent field visit, we found the price premium to farmers for organic cocoa to be about $100 per ton. However, it takes three years to become certified organic, and most farmers lack the sophistication and financing to apply appropriate organic inputs, so their yields may actually decrease.

Another problem with certifications is the use of what is known as mass balancing, which allows companies to apply certifications to non-certified cocoa if it matches the total amount of certified cocoa they buy. This represents a lack of traceability and misrepresentation to customers paying the premium.

So what is the solution? At Palladium we believe it starts with large companies integrating their sustainability function into the commercial side of the business. Aligning objectives leads to innovative new ways of thinking about sustainable supply chains featuring direct, transparent and long-term partnerships with producers. In the case of cocoa, this means products differentiated in the market by quality and flavour of the cocoa, with producers and supply chain managers incentivised by long-term buying commitments to invest in post-harvest and on-farm modernisation.

Progressive supply chain managers and nucleus farms can facilitate the delivery of technical extension services and finance for farmers with the support of companies excited to access the smallholder market. For example, in Peru, buyers such as Italy’s ICAM are directly sourcing cocoa from supply chain managers that are investing in centralised post-harvest processing facilities. This in turn has encouraged input and equipment companies such as Yara, Husqvarna and Naandanjain to invest in training, certifying lead farmers as their technical agents.

This allows for the further dissemination of technology and creates opportunities for rural entrepreneurs. The direct commitment between end buyer and producers (through a supply chain manager) facilitates access to finance. Transparency and traceability build trust. In five years, the average farmer has tripled the size of its farms, receives 20% higher prices and is on track to double yields. Meanwhile the chocolate company can count on reliable supplies of fine flavour profiles for high end recipes.

In the palm oil sector, the solution also involves a systemic approach. In Ecuador and Colombia, for example, analyses of the palm oil ecosystem conducted by Palladium have found that a focused effort to improve productivity of small- and medium-sized farms by the larger producer/oil companies allows the latter to operate more efficiently and increase their sales without developing new farms. End buyers who value sustainable oil will pay a premium because of the full transparency and traceability within this supply chain. Indeed, a long-term commitment to purchase sustainable palm oil will drive systemic investment and improvement more effectively than the certification requirement.

Successful implementation of system strategies requires alignment of objectives among producers, extractors/refiners and end buyers, with appropriate metrics for measuring performance and processes for ensuring transparency and trust. The resulting information can be easily verified by third party auditors.

Sustainability pilot projects usually wither away once the funding runs out. Inclusive business models that create value while reducing risks for all the actors in the supply chain will also be able to attract outside capital to succeed as ongoing and scalable businesses. Sustainability can only be achieved if farm and rural worker households have a clear pathway out of poverty and a real incentive to employ environmentally sound practices by being anchored to the market in a long term, mutually profitable business arrangement.

This article originally appeared on Ethical Corporation and was republished with permission.