“The pricing is the engine of sustainability and is something we must always look at,” stresses Ismail Pomasi, a member of a cocoa cooperative in Ghana’s Ashanti region.
This is also the conclusion of the latest Cocoa Barometer, a report on the cocoa and chocolate sector that is published every two years.
The report is scathing when describing the many programs that aim to improve some aspect of the cocoa trade yet neglect the most important factor of all: the need to reduce poverty. Without higher incomes, the report suggests, it will be impossible to meaningfully tackle child labor, deforestation, or the other problems associated with cocoa production.
In some ways this is uncontroversial. Big chocolate companies have made statements on the need for a living income. Cemoi and Nestlé have committed to paying farmers more for sustainable practices. But the Cocoa Barometer argues that these sorts of programs are vague and ineffective – lip service rather than actual improvements in farmers’ lives. “In practice, not a single large chocolate or cocoa company is paying higher prices at farm gate level,” the report declares.
One problem is that much of the conversation has focused on increasing productivity: each farmer producing more cocoa. But this doesn’t meaningfully increase small farmers’ income in practice, as more supply drives down prices. And making a decent living conditional on higher production means that farmers can’t count on a stable income.
Nor is it easy. Requiring farmers to do more with limited resources makes it more likely that they’ll need to pull kids out of school to work, or turn to other ways of making ends meet in desperate circumstances.
The chocolate sector is well aware of the labor problems that have damaged its reputation. But it generally remains focused on changing the practices of farmers, even though they have the least power and resources of anyone in the supply chain.
As it stands, West African cocoa farmers find it hard to earn a living. Only around 5% of the sales price of a chocolate bar goes to the farmers. Farmers aren’t even receiving the full cost of production, according to Alex Assanvo, the executive director of the Côte d’Ivoire and Ghana Cocoa Initiative.
And while oversupply of cocoa makes prices plummet, undersupply doesn’t really benefit farmers, according to Antonie Fountain, co-author of the Cocoa Barometer and a managing director of the VOICE Network. He says that when cocoa prices go up, chocolate manufacturers have a bevy of tools to protect their profits: for instance, adding more ingredients like biscuits to chocolate bars, upping the amount of sugar, and shrinking packages. Farmers don’t have similar ways of bouncing back from price changes.
So given their low power and low earnings, putting the burden on farmers to change is neither fair nor practical.
Nor would it be effective to place the most pressure on consumers. There’s not always a strong link between end prices and farmgate prices, due to the complex international intermediaries that are invisible to most of us. Ultimately, the people who have the most control over prices paid to farmers are the buyers of farm products, not the final consumers. This middle space of the supply chain is where most of the profit lives. And that’s where the change needs to happen, the Cocoa Barometer argues.
The other approaches haven’t worked. As Fountain puts it, “Farmers are still poor, children are still working, trees are still being cut down.”
Fountain believes that what’s needed is a change to core business practices, rather than charity: “We need to start challenging the purchasing practices of the large companies.” And that happens through fair contracts, which removes more risk from the farmers who have the lowest capacity to absorb risk.
This has environmental benefits as well as respecting human rights, says Fountain. If farmers know they’ll be able to sell a certain amount of cocoa for a price that can sustain their families, they don’t need to clear forests to plant more. “The biggest environmental threat in the cocoa sector is poverty,” Fountain notes. Likewise, Pomasi says that amidst the pressures of inflation, some fellow farmers have no choice but to sell their land for illegal mining.
It might seem like a pipe dream, but fairer pro-farmer contracts already exist in small corners of the sector. Tony’s Chocolonely, a popular chocolate company founded by Dutch journalists, has longer-term contracts with farmers, based on decent prices. These rates depend on the Living Income Reference Price (LIRP), a supplement paid to farmers in order to reach a living income, which rises as the cost of living does. The LIRP is optional as part of Fairtrade.
Tony’s Chocolonely goes further in recognizing that this is a baseline, but not necessarily the best deal for farmers. The company pays an additional premium, adding up to what it claims are the highest farmer incomes. This system involves fully traceable cocoa butter – a rarity for the sector – in a system known as Tony’s Open Chain. The company offers these monitoring tools to others.
The LIRP isn’t perfect, as smaller farmers aren’t eligible. But it stands out in a sector awash in certification programs and sustainability efforts that sound lofty but just don’t work, year in and year out.
There are some other good examples. Instead of taking raw cocoa from West Africa and processing it in Europe, where most of the profits accrue, the fairafric factory is producing chocolate, training chocolatiers, and offering tours in Suhum, Ghana. This Ghanaian-German company pays cocoa farmers a premium of $600 per ton on top of the global cocoa price and the Living Income Differential (LID).
The Living Income Differential (LID) itself is $400 per ton. Unlike the many programs conceived by companies or nonprofits based far away from producing countries, the LID was developed in 2019 by the cocoa marketing boards of Ghana and Côte d’Ivoire. Together the two countries produce nearly 70% of the world’s cocoa.
Initially the idea was for the two countries to use their market share to set and stick to a price floor. This would be a guaranteed price for buyers of Ivoirian and Ghanaian cocoa. But the European-dominated chocolate companies weren’t sold, and pushed instead for an income differential. The outcome has been disappointing.
For one thing, some companies’ purchasing departments have simply decided to source their cocoa from South America instead, undercutting the LID. And in a more complex demonstration of cocoa economics, traders have reportedly driven down the origin differential, another premium that determines the price. With the origin differential lower than zero, the benefit from the LID has been wiped out.
So not only have large chocolate companies fought to reduce the scale of the LID; they’ve also maneuvered to keep from paying it.
There’s some reason for hope. The European Union’s recently-agreed Deforestation Regulation would ban cocoa that contributes to deforestation (although most cocoa isn’t traceable, and the regulation doesn’t apply to smaller farmers). And companies like Tony’s Chocolonely show that despite the complexities of cocoa economics, it’s possible to cover the most fundamental thing: paying cocoa farmers enough.
It’s simple, but bears repeating. “We are just asking for a fair price,” Assanvo highlights.