Tuesday, March 1, 2011

Are we running out of cocoa?

by Wolfgang Weinmann

The recent worrying news from Ivory Coast, the world's largest cocoa bean producer, threatening to temporarily suspend any export, has sent cocoa prices to a record high. UK accounts for an estimated 34% of global production, and cocoa prices are up by more than 20% since the start of the year. So, what does this high volatility mean for businesses and their supply chains?

When talking about sustainability in such a high-charged commodity environment, it's important for a business to take into account both sides of the equation – that of the producers' and the business. In the case of cocoa this means millions of smallholder growers, mainly in countries in sub-Saharan Africa, with unacceptable high levels of poverty. While the rise in market price of crops such as cocoa means the input costs at Cafédirect are going up significantly, as for all other cocoa purchasers, the producers are not necessarily feeling the benefit of this. The price spikes in other volatile commodities, particularly food and oil, means that both the cost of production and the cost of subsistence food has risen for the growers too.

Of course in a market economy one never can take out volatility and speculation completely, but by working in partnership both Cafédirect and the producers are better able to understand and more effectively manage risks in the supply chain. This collaborative working relationship is beneficial to the producer and offers distinct commercial advantages too. 

For example, when we were looking to create our new instant hot chocolate, we realised that it was important to source a new producer partner, as at that time we were only working with one cocoa smallholder cooperative. This posed obvious threats to our supply chain and we needed to reduce those commercial risks. 

However there was also the exciting prospect of being able to extend our social-economic impact and find a new emerging source of cocoa that we could bring to the world market. As a result of months of research and subsequent country visits we have now found a group of smallholders on the island state of São Tomé in west Africa, who grow the rare criollo bean which produces an incredible fine grade quality cocoa. São Tomé is one of the least-developed nations in the world with annual average income of US$ 1,875 per person1. 

Before being able to actually buy from this producer group, Cafédirect has spent 2 years investing heavily in infrastructure to add value at source (such as fermentation tanks and drying tables) and training courses for producers. A producer-owned and managed export cooperative was set up enabling them to trade directly on the international market with other buyers and to apply for Fairtrade certification, which they would have been unable to do without the governance systems in place. 

The end result has been an incredible 500% increase in the income from cocoa crops for smallholder producers in São Tomé. The way they trade has been transformed; from selling raw or "wet" cocoa on the side of the road to passing local traders, to bypassing the middlemen and processing the wet cocoa themselves into dried, fermented beans which they now sell on the international market. 

All this was done through an innovative collaborative public-private partnership approach with producers, the UN's International Fund for Agricultural Development (IFAD) and UK's Department for International Development (DfID), along with funding from Cafédirect. Instead of sourcing suppliers from the register of commodity traders, Cafédirect's approach to finding a new cocoa supplier has resulted in a new cocoa producer group brought into the market.

Such direct trading and long-term, personal relationships with producers offer clear benefits to all involved. For the producers it provides long term and secured market access, generates added value to the crop, ensures investment back into farms and producer organisations to improve yield and quality thus achieving economic, environmental and social impact where it counts most: in smallholder producer communities.

For a business like Cafédirect, it secures constant supply; lowers the default levels of contracts; ensures consistency of quality raw materials; opens a pipeline of information from the ground about yields and any potential issues and thus reduces overall risks to the business. Most importantly this contributes to our understanding of the impact that a business should have to a wider stakeholder community, not just its own shareholders.

The traditional, outdated trading model needs to change if we are going to secure a cocoa supply chain that respects people and planet and guarantees both, sustainable high quality products but, crucially, also the livelihoods of the producers and their communities.

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