Global demand for cocoa is projected to grow to $98.3 billion in 2016. With demand for chocolate and other cocoa products rising, businesses along the cocoa value chain are challenged by a host of factors, including unfair trade and predatory business practices, social discontent, environmental degradation and climate change.
Growing middle classes in Asia and around the world are contributing to increasing demand for higher-quality cocoa products, yet cocoa cultivation remains labor- and time-intensive. That poses challenges for producers of all sizes. Sustainability standards and inclusive business models place greater value on longer-term social and ecological benefits as opposed to simply maximizing yields and productivity, however.
Focusing on two of Asia’s principal cocoa producers – Indonesia and Vietnam – CSR Asia, in collaboration with Oxfam, assessed sustainability across the cocoa industry, asserting that development of more inclusive business approaches would benefit smallholder producers, consumers and participants across the cocoa value chain.
The cocoa market and value chain
West Africa supplies 73 percent of worldwide cocoa supplies, with the Ivory Coast being the largest producer by far. Cocoa farms in Asia and Oceania produce another 14 percent, with Indonesia as the world’s second-largest cocoa producer, harvesting an estimated 700,000-plus metric tons of cocoa beans in 2011. Cocoa producers in the Americas account for another 13 percent of global supply, with Brazil producing nearly 250,000 metric tons in 2011.
Cocoa supply is expected to fall short of demand in 2013-2014 “despite robust production in the first quarter of the season,” primarily due to demand for cocoa butter, which has reached a seven-year high, and rising demand in emerging markets, Asian markets in particular, CSR Asia notes in its report.
When it comes to cocoa production, smallholders predominate. Over 90 percent of world cocoa supplies are grown on smallholder farms, CSR Asia highlights in “Inclusive Business in Asia: A Case Study of Cocoa.” An estimated 5.5 million smallholders and 20 million family members are dependent on cocoa for their livelihoods.
As is the case across the spectrum of agricultural commodities, it is the middlemen – the processors and distributors – that garner the biggest slice of revenues and profits from cocoa, however. Multinational commodity trading giants, such as Cargill and Archer Daniels Midland, dominate the industry. Rivaling them, at least in the size of their businesses, are the world’s largest chocolate and cocoa products manufacturers.
Cocoa: Key challenges and inclusive business opportunities
An inclusive business approach would benefit all parties. As Erin Lyon, CSR Asia executive director, said in a press release:
“A particular passion is required to grow cocoa – it requires time consuming TLC: Tender, Loving Care. Smallholders can find better returns growing other commodities. Consumers, who have a growing passion for chocolate products, will ultimately pay a greater price if the industry does not shift to an inclusive business model approach.”
CSR Asia summarizes the key challenges facing the cocoa industry as follows:
- Low productivity and quality;
- Diseased and aging trees;
- Questions over sustained investment in sustainability initiatives;
- Complex trade flows and changing taxation climate;
- Poor pricing transparency;
- Inefficient project management and poor governance;
- Inadequate trust;
- Land pressures;
- Aging farmers;
- Gender inequality; and
- Limited multiple livelihood strategies
As a result, the future of cocoa production is uncertain. As the report authors state:
“[I]t is to be determined if current initiatives can shift to the adoption and promotion of inclusive business models, thereby addressing key challenges facing the cocoa value chain, which include: protecting the environment, dealing with the impacts of climate change, ensuring livelihoods that are sustainable for current farmers, promoting gender equality, creating sufficient incentives to encourage future generations into cocoa farming, whilst simultaneously educating consumers about the value of cocoa.”
Gathering accurate data on cocoa production is a significant problem for those looking to better understand the industry and develop inclusive business models and sustainability standards and certifications, CSR Asia points out. U.N. FAOSAT reported Indonesian cocoa production for 2011 at 712,220 metric tons while Reuters reported output of 435,000 metric tons.
Cocoa in Indonesia
Some 1.5 million – 1.6 million hectares (3.7 million to 3.95 million acres) of Indonesian land is under cocoa cultivation, according to the Indonesian Cocoa Association (ASKINDO), with the southeast Asian nation producing 575,000 metric tons in 2013. Nearly 296,000 metric tons were exported, generating foreign exchange revenue of some $794.8 million, down from 388,000 metric tons worth $1.05 billion in 2012.
Excluding workers in the downstream, processing and distribution sectors, it’s estimated that over 6 million rural Indonesians rely on cocoa production for their livelihoods.
Indicative of trends across the Asia region, Indonesian cocoa production has plateaued at around 500,000 metric tons per year, and the country has gone from being a net exporter to a net importer of cocoa. Tax incentives for local grinders has contributed to the shift, but so has the declining condition of Indonesia’s cocoa trees and water shortages. A long, convoluted supply chain, and poor price dissemination, particularly down to the smallholder producer level, are likewise hindering sustainability efforts.
Such efforts are also hindered by a lack of knowledge and expertise, even on the part of international development programs. As the report authors note, “[P]oor project implementation and the lack of specific crop expertise from trainers have resulted in waste and inefficiency. One stakeholder reported the loss of billions of rupiah spent on the wrong type of cocoa seedlings.”
Sustainability and inclusive business across the cocoa value chain
Cocoa farmers, processors, distributors, governments, international agencies and NGOs are working to develop healthier, more sustainable business and industry models, methods and practices.
Global chocolate and cocoa product manufacturers Mars and Nestle are among the cocoa industry participants taking a multi-stakeholder approach to enhancing sustainability, the report authors highlight.
- Farm management;
- Product handling;
- Product traceability;
- Human resources;
- Natural resources and biodiversity;
- Certification group management; and
- Social and environmental responsibilities.
Certification alone isn’t sufficient to assure establishment of more inclusive business models and sustainable cocoa business propositions for smallholders, however, CSR Asia contends.
For one thing, premiums for sustainably produced cocoa in the global market aren’t high enough to reach required production levels. “Margins are thin for cocoa trades and stakeholders argue that cocoa prices on international markets do not reflect the realities of the cost of cocoa production,” the report authors point out.
Consolidation, meanwhile, has left supply largely in the hands of “a handful of dominant traders.” Furthermore, the report authors continue, there’s a need for greater transparency at every level in the cocoa value chain.
The next step to assure overall sustainability across the cocoa industry value chain, according to CSR Asia, is to move “beyond a productivity agenda” and towards an inclusive business approach. Elaborating, CSR Asia Chairman Richard Welford said:
“It is clear that the next generation of farmers will not want to grow cocoa unless they can see greater returns for their efforts. Unless we can improve quality, productivity and incomes of farmers through inclusive business interventions, then there may simply be no cocoa being grown in Asia in the future.”
“An inclusive business approach,” CSR Asia continues, “would move towards a model that rewards the smallholder in the value chain as producers – building productivity and product quality to meet market demands whilst at the same time improving and protecting the economic, environmental and social conditions in smallholder communities.”
Image credits: CSR Asia, “Inclusive Business in Asia: A Case Study of Cocoa”