Summary
While the EC is preparing ‘due diligence’ regulations linked to both human rights and deforestation concerns, current market trends and the sourcing decisions of some cocoa grinders is undermining the newly introduced Living Income Differential scheme jointly agreed by the governments of Ghana and Cote d’Ivoire, with the aim of securing a living income for cocoa farmers. Establishing EU ‘due diligence’ requirements which ensure all cocoa products placed for sale on the EU market are sourced from countries where minimum producer income requirements are met (e.g., the LID), would make a major contribution to ongoing efforts to lift cocoa farmers out of poverty across the globe. This is the critical policy challenge faced.
On 12th April 2021 Fairtrade organisations urged the EU to include concrete measures to promote a living income for cocoa farmers in ‘any forthcoming human rights due diligence requirements.’ This comes as the EC has convened a ‘series of multi-stakeholder talks on sustainable cocoa to feed into relevant ongoing Commission initiatives, including on due diligence and deforestation’ as well human rights due diligence requirements. Specific EC proposals on human rights due diligence and deforestation due diligence are expected in the course of 2021 (1).
As part of the current discussions, the European Cocoa Commission has endorsed proposals for EU accords with producing countries designed to ensure ‘an enabling environment across the whole cocoa sector will be reached.’ However, it was highlighted how ‘the price that cocoa farmers earn is not the only element necessary for their families to reach a living income’, although it is seen as an essential element.
Jon Walker, Senior Advisor for Cocoa at Fairtrade International, insists the EC has to address the living income issue either directly through price provisions or ‘indirectly through the incorporation of living income in human rights due diligence’ (1).
Regulatory action in this regard would appear to be of considerable importance, with the October 2020 initiative of the government of Ghana and Cote d’Ivoire to implement the living income differential (LID) payment of $400 per tonne currently being undermined by market price developments and the sourcing decisions of some grinders.
Confectionerynews.com reports the backlog of unsold cocoa in West Africa from October 2020 to March 2021 was partly attributable to some buyers reacting to ‘the LID by reducing stocks or seeking out cheaper cocoa from other sources’ (1). This would appear to be confirmed by ICCO’s February cocoa market review which revealed in Europe the share of Nigerian cocoa beans rose from 12% to 25%, while on a year-on-year basis the share of Cameroonian and Ecuadorian cocoa beans on the US market increased from 2% to 17% and from 1% to 14% respectively (4).
In contrast ‘the share of Ivorian cocoa beans at exchange grindings decreased from 75% to 55%.’ These trends have seen the Ivorian government announcing a ‘25% reduction in the farm gate cocoa price… for the next six months’ (4).
In addition, as analysts have pointed out ‘cocoa futures have been performing poorly since the beginning of the year’ (4). This comes on the back of a year (2020) characterised by considerable volatility in cocoa prices. Average monthly prices fell 19% between January and July 2020, before recovering 17% by September 2020, and then falling again by 7% by October 2020.
A subsequent recovery to March 2021 saw prices at 5 % below January 2020 levels, which at the time were at the highest level since October 2016 (2). However, with unsold cocoa bean stocks overhanging the market in the face of the effects of the Covid-19 pandemic on consumer demand, and bumper harvests expected in some West African countries (4), future cocoa prices are expected to come under increased pressure.
Indeed, there are already indications this is underway. According to cocoa price data reported by Trading Economics, between 9 March and 4 May average cocoa contract prices fell some 19% (from 2,804.26/tonne to $2,280.45/tonne), although in the following days prices recovered somewhat on the back of announcements of the easing of lock down restrictions across Europe. This took prices back up to levels only 7% below 9 March 2021 levels (3).
This market uncertainty and associated price volatility, when coupled with the trend towards increased purchases of cocoa from countries which are not implementing the LID, is potentially trapping West African cocoa farmers in poverty, not despite the LID initiative, but rather because of the LID initiative.
| Comment and Analysis ICCO country of origin figures for cocoa purchases in the first quarter of 2021 suggest some grinders are turning away from Ghana and Cote d’Ivoire in the face of the $400 Living Income Differential (LID) levy.Against this background, an EU ‘due diligence’ requirement to the effect that cocoa used in all cocoa based products placed for sale on the EU market should be sourced from countries which meet minimum producer price requirements (e.g., the LID) or schemes within a country which provide farm gate minimum income guarantees, could make a major contribution to ongoing efforts to lift cocoa farmer across the globe out of poverty. While a Covid-19 driven economic downturn scarcely provides the most propitious environment for the pursuit of such minimum farm gate income guarantees, the overall effect of such efforts in terms of increased consumer prices would be minimal. Based on data compiled in 2015 it was estimated cocoa farmers receive only 6.6% of the final sales price of a bar of chocolate, this compares to the 16% price share which cocoa farmers enjoyed in 1980 (5). If the share of farmers income in the final sales price of chocolate products were restored to 1980 levels, farm gate incomes could increase by 142%, while a doubling of farmgate incomes could be achieved by chocolate manufacturers and retailers taking a 5% reduction in their share of the final sales value and consumers paying half a Euro cent more on the final sale price of a €0.79 chocolate bar. This would scarcely make a dent in the profits of major multinational chocolate companies who have seen a dramatic increase in their profits since 1980. Clearly, bringing about such change is hardly as simple as the foregoing example. However, this does illustrate the scope for decisive action to get to grips with endemic poverty in the cocoa sector. The question arises as to whether the EC is willing to take such a lead at the global level, drawing on the inspiration of its internal policy initiatives to strengthen the functioning of supply chains to the benefit of domestic EU agricultural producers. |
Sources:
(1) confectionerynews.com, ‘European governments and legislators urged to help cocoa farmers as prices continue to fall in West Africa’, 13 April 2021
https://www.confectionerynews.com/Article/2021/04/12/European-governments-and-legislators-urged-to-help-cocoa-farmers-as-prices-continue-to-fall-in-West-Africa
(2) indexmundi.com, ‘Cocoa beans Monthly Price – US Dollars per Kilogram’
https://www.indexmundi.com/commodities/?commodity=cocoa-beans&months=60
(3) Trading Economics, Cocoa
https://tradingeconomics.com/commodity/cocoa
(4) confectionerynews.com, ‘Production surplus could weight down cocoa future in Q2’, 1 April 2021
https://www.confectionerynews.com/Article/2021/04/07/Production-surplus-could-weigh-down-cocoa-futures-in-Q2
(5) Cocoa prices and income of farmers
https://makechocolatefair.org/issues/cocoa-prices-and-income-farmers-0