No need to question the relevance of ‘fair pricing’

Nico Roozen analyzes and responds to a recently published report of Wageningen University & Research and Mondelez International, which examines the path towards a living income for cocoa farmers. The report expects more positive results from higher productivity per hectare and suggests that ‘a living income for many smallholder farmers is unrealistic.’ The recommended option for them is to go out of business “looking for a better job.” Is this the more balanced understanding of realities we are looking for?

Let’s first explore what information the report brings to the table. The report doesn’t disappoint on this point, presenting a wealth of data and facts. The most interesting findings can be summarized as follows:  

‘’While most living income studies agree that less than only one-quarter of cocoa farmers in West Africa are currently reaching a living income, there is significant variation between studies, from 17-24% in Ghana, and from 10-26% in Cote d’Ivoire. It is estimated that in both countries combined, up to 2 million smallholder farmers produce cocoa. The income gap between the average income of those farmers and recent living income benchmarks equals about 5.5 billion dollar per year. That’s almost the total annual cocoa export earnings. Paid as a uniform price premium, this 5.2 billion dollar would allow only 30 to 40% of the farming households to reach a living income, as many farmers earn less than the average. If such a measure would aim to lift a clear majority of farmers to a living income, about 10 billion dollars would be needed for 75% of households.”

Cocoa farmers are not a homogeneous group. There are significant inequalities among these households in terms of access to the resources needed to achieve high returns from agriculture; notably land, financial resources and labor. Some farmers with low production efficiency and small parcels of land may never be able to produce enough volume of cocoa to reach a living income, no matter how high the price of cocoa. Meanwhile, larger farms with more land often suffer from a lack of finance, labor or other resources that prevents them from reaching adequate productivity levels. The unequal distribution of land and sales volumes leads to unequal distribution of farmer household incomes. 50% of all income earned from cocoa goes to the top 12% of producers. Among all, it is typically women and children that are most severely impacted by unequal access to resources and effects of poverty.” 

The farming families with the largest sales volumes have the highest potential to earn a living income. Male-headed households are about five times as likely to reach the living income benchmark. At the same time, women-headed households are significantly less likely to achieve a living income. While the correlation between size and income exists, it doesn’t tell the whole story. In Ghana, land-tenure agreements that specify how revenues must be split between landowners and farm managers, caretakers or sharecroppers are popular and influence the relationship between farm size and income. While the most efficient farms — highest productivity per unit of land — are not the largest ones across all farmers; it holds true that the larger the farms, the more cocoa is produced and sold.”

Farming families that are operating at below an average income level can be trapped in a cycle of poverty because they cannot invest enough in their farms. Farm development may stagnate, and households may struggle to afford labour and other inputs. Such a cycle may lead to continually declining yields. On average and by total cocoa sales, the top fifth of farmers spends significantly more on fertilizers and labor per hectare than the bottom fifth.   

The less income a farming family commands, the less likely they are to withstand income shocks and the riskier any investment is to them. The assessment of these risks makes farmers careful about investments. The debt fall is a real risk for them.” 

The cocoa farmer in West Africa has few alternative options for income-generating activities. Without alternative markets, they will continue to produce cocoa even at very low prices. Many households are over-dependent on cocoa. The average cash income solely earned from cocoa is estimated to be at about 80-90% of the total household income. They are locked into an economic activity that might not fit their capacities and does not deliver to their needs. This is a sign of over-dependency and lack of alternative market opportunity leading to the failure of the free market- and requires interventions to correct. 

Switching to other activities is especially difficult in the case of tree crops, as they are capital-intensive crops that require significant resources to replace or renovate. Decreasing prices and incomes make it continuously more difficult to transition to alternative income earning options.” 

So far, so good!

Let’s see what strategic guides the report offers: The report gives an assessment and success rating of two types of interventions; achieving a living income through fair prices or alternatively through higher productivity per hectare. 

The main takeaway on higher farmer prices is the conclusion that: “it does not seem right to focus only on price and premium approaches if a trickle-down effect to other families is not expected, or if the premium is unlikely to incentivize production across all farming families at levels that would guarantee significant premium sharing and that can be sustained. Even drastic increases in the price of cocoa will not lead to an end of poverty for the poorest farmers.” 

The main takeaway on productivity enhancement is more positive, concluding that “yield increases have a larger effect on decreasing income gaps than price increases when all else remains equal.” 

However, given that higher production volumes over the years have rather led to lower prices on the world market, with world price being a major determinant of farmer income, it is too simplistic to assume that higher yield will result in the end in increased income. In a practical sense, all else cannot be equal. 

A neglected aspect in the study is that a better price translates directly into a better income for farmers

To come to the final conclusions in the report data sets are compared and analyzed. Albeit, in a debatable way.

The impact of better farmer prices through premiums is analyzed in different scenarios in a range of 0.4 to 1.0 times actual market prices. 

The impact of increased productivity is analyzed in a range from current low levels of 300 kg per ha to more optimal levels in a range of to1500 kg per ha, and even to rare levels of 3000 kg; a factor of 5 to10. 

A comparison of the effects of better pricing and higher productivity based on an unequal multiplier gives a predictable outcome; in this case in favor of productivity.   

Moreover, a neglected aspect in the study is that a better price translates directly into a better income for farmers. There are no added costs for just getting a better price. Each extra dollar counts as income.

This is a relevant factor because higher productivity levels depend on significant investments and costs. In the study, the net income effect of productivity increases is calculated at 70%, based on a modest 30% deduction for costs. 

In reality, investments are often much higher; between 50% to even 90% of the revenues generated by higher sales volumes. The debt amortization period is long and risky. So the net contribution to income is significantly lower. Margins in all different agricultural production systems are always small. Low prices, from a weak bargaining position, are the reason that agricultural markets are characterized by many farmers and only a few buyers.

Given that higher production volume over the years has rather led to lower prices on the world market, with world price being a major determinant of farmer income from cocoa, it is too simplistic to assume that higher yield will result in increased income. 

The argument prioritizing higher productivity above better prices is based on the consideration that the smallest segment of farmers producing low volumes of cocoa has, relatively, a modest advantage from better prices. This is evident. Economics teaches us that a farmer’s income is: volume times price minus costs. 

So farmers with more land and higher sales will benefit more from higher prices than the lower segment of the smallholder population producing modest volumes. But this relatively lower effect does not make a higher price irrelevant to them. In absolute terms, some more money is for sure a meaningful effect allowing farming families to escape from extreme poverty. 

Embedded is a broad range of supportive measures: a higher price is even a crucial stepping stone to savings for investments to a more productive infrastructure. Just making the statement that ‘ it is better to look for another job’ is irresponsible knowing that these jobs don’t exist yet. 

After a close reading, it became clear to me that the report is in some sense a compromise between the different perspectives of science and businesses, represented by the WUR and Mondelez. In all scenarios, a significantly higher price for cocoa is a precondition for the transformation to a more sustainable sector and a decent income for farming families. 

A plea for an integrated approach

The main question to be answered is what overall strategy is needed to make the cocoa sector future-proof?

I suspect quarreling about the relevance of each partial contribution for solutions is a waste of time. Doing so, we risk that some actors lean behind arguing that other actors are the main cause of the problem and by consequence the only or first change maker. This will not provoke a common understanding of solutions and joint actions. 

Let’s try to understand what comprehensive strategy for systemic change is needed and what demand and value contributions from all players are involved. Here, an examination of seven interrelated interventions for future-proofing the cocoa sector:    

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For a long time the elephant in the room. However, the correlation between income and land size is evident. Data from the WUR study indicate that larger land-holding households achieve the highest net income from cocoa. Unfortunately, the study is not explicit about a minimum size or an optimal one.

The reality is that average farm size is constantly declining as inheritance is the major means of land access, which leads to land fragmentation, and by consequence, very small farms are dominant now. From the actual size of 1.5 to 2 ha it is hard to take the threshold to growth. When the line of 2 ha is crossed, hired labor has to be contracted. Farms of a smaller size cannot afford paid labor and will only survive with the full support of farming household members. In this setting child labor is structural; not to be understood as exploitation, but as a way to survive. Passing the critical 2 ha line is only possible if work is organized in a different way; through mechanization, paid hired labor, or a combination of both, service provision. 

Upscaling size will be impossible without the combined positive effects of higher productivity and better prices for cocoa, in order to build the capacity for investments. Moving to a significantly higher average farm size — say between 5-10 ha — is a crucial step to move to a future-proof agricultural entrepreneurship, within a more robust smallholder environment. From a cocoa farmer to a farmer with a mixed farm.

Efficiencies, innovations, and cost reductions are crucial in the phases of cultivation, harvesting, and post-harvest treatment. Actually, costs of production are hidden by unpaid or low-paid labor. It is interesting to see that the reported labor conditions at the farm are not described in terms of child labor or — in the insane framing of Tony’s Chocolonely — of systemic slavery, but more realistic in terms of family labor from the perspective of households. 

Higher farm size linked to the scale of operations will reduce costs per unit. Service provision turns out to be a cost-effective tool for getting access to knowledge, mechanization and time-bound labor services. Short-term turn-around management can dynamically guide this process of modernization. Evolving discussions to decarbonize various sectors of economic growth, in an attempt to reduce emissions should include farmers in a manner that brings returns to incentivize sustained efforts and serve as an additional source of income. 

Sustainable intensification is the way forward.

Sustainable intensification is the way forward. The average productivity figures are far below optimal harvest targets. Sustainability is key; not going for the old concept of maximization at the cost of the quality of soils, water and biodiversity. Optimization respects these boundaries while realizing higher yields. Safe and healthy working conditions are conditional. 

The relatively new concept of agroforestry will open new frontiers safeguarding the value of forests and biodiversity. Societal payments for these services are crucial to bring this concept to scale.  

Fair pricing is crucial

The true price will have to tell the truth about the social, environmental and economic costs of the production of cocoa. Or in more classical terms cost internalization is key. This is not only an issue of fairness. In the end, it is the precondition for the continuation of the business and the future of our planet and mankind. 

Fair pricing is crucial. Unfortunately, the reality is that direct sourcing and price premiums are still a niche concept in spite of all the efforts of the growing number of frontrunners. Mainstream buying practices are still linked to the terminal market offering an important balancing function. For cocoa trading companies the futures market is less a tool to benefit from speculation, but rather to provide security in planning production costs ahead. The resulting prices might be financially efficient, however, they do not equally assure social and environmental safeguards. 

Cocoa traders usually explain to me that they are not opposing higher farm gate prices if all competitors are paying more and the market can absorb higher prices without a significant drop in demand. It is hard for them to live with a competitive disadvantage. By consequence moving from niche to mainstream fair pricing on a voluntary basis will remain a challenge.

For this reason, social and environmental cost internalization requires regulations, taxes, laws, countervailing powers to create a mature level playing field from a broader set of responsibilities for the planet and people. No escape anymore, going beyond neo-liberal myths. 

Gradually, a farmers’ identity will no longer be a ‘cocoa farmer’, but a mixed farmer serving different markets with a range of products.

Africa is actually importing food for an amount of 35 billion dollars a year; by 2030 imports will amount to at least 100 billion dollars due to growing demand from a rapidly growing population and the emergence of a more demanding urban middle class. 

Against this background, it is irresponsible just to think in terms of challenges. There are huge opportunities on the horizon. The issue is how to navigate these changes. 

Smallholder farmers do not easily switch to alternative income activities because it is costly to make upfront investments. It is risky because returns are still unclear and in the case of tree crops significant resources are needed to replace or renovate. Not to mention the knowledge limitations to successfully engage in these alternative income activities, as most of these activities are new to them.

Cocoa has a history of more than 400 years of investment. Currently, cocoa is still the crop most heavily supported by industry and government promotion, extension, and marketing. 

However, gradually, a farmers’ identity will no longer be a ‘cocoa farmer’ but a mixed farmer serving different markets with a range of products. Both price and productivity increases may induce overproduction. Diversification is the countervailing power. Less land for cocoa with a higher return. 

For producing alternative crops a lot of investments have to be made in market development creating an infrastructure of support and knowledge, transport, storage systems, distribution and retail. The concept of the future is growing the same amount of cocoa on less land combined with a radical diversification to alternative crops being the post-colonial business opportunity of mighty Africa. 

Being (digitally) connected is a crucial aspect for innovation and growth. Loose market linkages are a risk for continuity and alternative trading options will reduce dependencies. Access to finance accelerates growth. Linkages to knowledge and technology are crucial. An entrepreneurial farmer is connected, moving from loose to tight linkages within the business and social environment. 

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Markets have the power to drive dynamic economies, but do not guarantee desirable social and environmental benefits and outcomes without guiding frameworks, incentives and corrections from governments and civil society. Good governance is key for sustainable development. 

The sustainable transformation of the sector requires a proactive role of governments setting future-proof conditions for growth. Among more, I share a few urgent political interventions.  

Governments have to be adequately informed about the dynamics in the global market. The 65% market share for West African cocoa is not a given forever. Markets are dynamic, actually showing the expansion of cocoa in Latin America and Asia. Brazil aims for a 10% market share by 2030 from 10 ha plus smallholders. There are lessons learned from coffee, where African producers, unfortunately, became marginal in the global coffee market. Market prices for coffee are based on the competitive cost price of large commercial estates and small farmers can not easily compete and suffer.  

Relating cocoa from West Africa to (forced) child labor linked to exploitation or even framed as slavery can destroy markets. A firm and proactive role of governments is urgent. A bad reputation in the new political context of upcoming due diligence legislation in Western countries could lead to de-risking imports, not solving issues but avoiding them. Leaving Africa behind.

Favoring local food production above imports is a demanding strategy of restructuring the national economy linked to the growth of African markets. Harbors are less important than continental transport systems. The road system is under pressure and seems to collapse. 

Addressing the issue of scaling up farmer size and diversification will require new legal frameworks, spatial planning and re-allotments. Other critical issues are related to land tenure and inheritance systems; the hard work of cultural changes. 

Above all, effective restructuring of the cocoa sector will highly depend on the creation of better jobs for the new generation. Now, often farming is a fate. It has to become an attractive choice in comparison to jobs outside the agricultural sector. History shows that modernization of agriculture always led to an outflow of labor from agriculture to better-paid jobs in other sectors. Jobs in Industry were initially the main way out, climbing the income ladder. The income ladder shows even more attractive options. Governments have to develop a coherent strategy for a radical modernization of their economies creating jobs within the concept of pro-poor growth. 

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My final remark is that I hope we will see more comprehensive scientific reports with more impact, not prioritizing one strategy above another, outsmarting essential contributions from other angels. This approach is fruitless. Let’s try to reach a scientific understanding on a coherent and comprehensive all-over strategy bringing stakeholders together and making them all accountable for each part of the solution. Only a smart balancing act between seven types of interventions will generate positive and lasting results.

Emeritus Professor of Impact Assessment for Food Systems Ruerd Ruben has written an article in reply to this article in his recent blogpost ‘Strong need to improve cocoa governance’. He argues that instead of combining different actions to strengthen the cocoa farming sector, we should consider the behavioral drivers of cocoa households for engaging in these strategies.