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Overview of the Cocoa-chocolate Global Value Chain

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Trade flows and main countries – Cocoa was originated from Latin America dating back to Early Formative period. Now it has been growing in more than 45 tropical area countries worldwide, dominated by African, Southeast Asian and Latin America countries (Wikipedia, 2019). At the global level, African countries remains the largest producers. More than 70% of Cocoa beans are grown in Cote d’lvoire, Ghana and Nigeria, followed by 17% from Southeast Asian countries such as Indonesia, the rest are grown in Central and South America such as Colombia, Brazil and Mexico. The two leading producers are Cote d’lvoire and Ghana worldwide.

Similar to coffee sector, the growth and production of cocoa beans are dominated by developing countries while consumption is mainly in developed countries. America is the largest consumer of chocolate, followed by European countries such as Germany, the Netherlands, France, etc.

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Price volatility in cocoa market – One of the major characteristics of cocoa market over the past decade is the high price fluctuation and increasing price. This volatility is attributed to several factors: 

1) political instability in African countries such as Cote d’lvoir, 

2) Unpredictable weather conditions, 

3) Unpredictable disease such as Ebola, 

4) increasing demand in traditional consumption countries and also new areas

5) M&A activities from industry magnates.

Government is central players in the value chain in setting the price. In Ivory Coast the Conseil du Café-Cacaom, the marketing board managed by the state is responsible for price stabilisation systems, based on the forward sale of cocoa.

Key competences of lead firms – Although the cocoa industry has a very large market, it still remains highly concentrated at the global level, with few players accounting for a major share in the market. One of the reason is the active mergers and acquisition activities taken by lead firms in the past few years, both vertically and horizontally . Economies of scale can be achieved by horizontal integration, and improve efficiency in the industry. Moreover, vertical integration enables the trace of sources and control of quality.

Besides low cost and traceability, another competence lead firms have is its strong bargaining power. The top four companies, ADM, Barry Callebault, Blommer Chocolate and Cargill control over 50% of the world cocoa processing and trading volume . In Cote d’lvoire, three international companies Cargill, ADM amd Barry Callebault buy 50% of cocoa beans produced in 2012 through their local agencies. This strong bargaining power enable them to dominant price in the market. They also have easier access to financial and technological resources.

 Overall map

Cocoa bean value chain involves the 5 major activities: 

1)cocoa beans cultivation

2)sourcing and marketing

 3)processing

4)chocolate manufacturing and distribution

5)final market retailing as shown in the below graph. Each link in the chain comprises a large variety of entities, from smallholder farmers in production to dominant international traders and chocolate manufacturers.

Cocoa beans cultivation 

Cocoa beans value chain starts from the production of cocoa beans includes

1) cocoa trees growing

2) pods harvesting

3) fermenting and drying process of beans.

Cocoa beans are grown by large plantations and small producers in tropical regions, the bulk of production coming from millions of farmers with small plots. Small farmer producers account for 80% to 90% of global cocoa production. It usually takes 5 years to grow a cocoa tree, and it will remain productive for around 30 years.

The main harvest season is between October and March the next year. The pods will be cut manually when they are ripe with blades. Specific harvesting time depends on the country. For example, the main crop period is from October to March in Cote d’Ivoire, and September to December in Indonesia.

After harvesting, cocoa pods are collected in large baskets and transported to the curing area to be fermented and dried. Covered with banana leaves of heaped into piles, the temperature in the pulp layer increases and ferments the cocoa beans for 3 to 7 days. This is a key step to give cocoa beans flavor. The beans will be under the sun for 5 to 10 days after fermentation.

Cocoa beans sourcing and trading – The dried, cured cocoa beans are then packed into sacks for transport. In terms of international cocoa beans trading, there are two ways:

 1) government purchases from small farmers at a fixed price and resell it to international buyers,

2) farmers trade their products directly in the market. Due to trade liberalizing reforms in the 1980s and 1990s, there is a trend towards the second method, with Malaysia and Brazil as representative countries.

Processing of beans – The processing stage composes of roasting and grinding. It is mainly performed in the consumption countries, but now producing countries are also engaged in processing activities more and more. Cocoa is roasted to reduce the water level and to obtain flavors. Time and temperature are the two determinants of the flavor of the semi-finished cocoa products. After the cocoa beans are roasted, they will be ground into cocoa liquor which can either be used directly for chocolate or make other semi-finished cocoa products such as cocoa cake and cocoa butter. Final products produced at the processing factory are cocoa mass, cocoa butter, and cocoa powder.

Manufacturing and distribution of chocolate – Mixed with sugar, milk, and other ingredients, cocoa products from processing factories will be made into chocolate. The industrial chocolate will then be shipped in tanks for utilization in dairies, bakers and confectioners. They will be transported by road to supermarkets and retail outlets. Retailing to final consumers – The final step of the value chain includes packaging, commercial, marketing, and retailing of chocolate products.

Type of governance

Being a labor-intensive industry, cocoa bean is a typical buyer-driven typology (Gerreffi, 1994). One of the critical actors in this value chain is lead firms. Lead firms refer to companies that have the control power over certain functions and can decide participants in these activities along the value chain. In the cocoa value chain, leading firms take the role of processors and brand manufacturers. The volume of their purchases gives them great power over suppliers. They actively help to create, shape and coordinate their supply chains.

Control over the processing and manufacturing link in the chain is highly concentrated. As mentioned above, ADM, Cargill, and Barry Callebaut control over 70 percent of the world grinding capacity, Nestle, Ferrero, and Mars control the world’s chocolate manufacturing. This chain can be characterized as being bipolar, in which two sets of lead firms in different functional positions competing for dominance, rather than just one group dominants (Fold, 2002).

In Gereffi, Humphrey and Sturgeon’s five govern linkages framework, cocoa-chocolate GVC can be identified as typical captive linkages, where less competitive suppliers need explicit instructions from the very dominant buyers, governed by buyer power (Gereffi, et al., 2005). The producers in African countries are provided with detailed requirements from lead firms for cocoas types, quality, material sources, and production process.

Role of Ivory Coast in the GVC

The Republic of Côte d’Ivoire is located on the south coast of West Africa. By 2017, the total GDP is USD 40.39 billion, and the population is 24.29 million (World Bank, 2017). 44.75% export activities in Cote d’Ivoire are related to cocoa products, with 31.7% from cocoa beans, 8.59% from the cocoa paste and 4.46% from cocoa butter respectively (Center for International Development at Harvard University, 2017). There are 600,000 farmers producing cocoa and about 6 million people working in the cocoa industry in Cote d’Ivoire.

 Functional role of Cote d’Ivoire in cocoa beans global value chain

The typical functional roles Cote d’Ivoire takes in the cocoa-chocolate global value chain is cocoa beans producer and trader. It is the world’s leading cocoa beans producer and exporter. In 2017, Cote d’Ivoire produced 2 million tons of cocoa beans, accounting for 43% of the world’s total yield (Statista, 2019).

Producer of cocoa beans is of great importance in international trade flows for cocoa related products as it is the supplier for raw materials for the industrial chocolate and ingredients used in confectionary, beverage, and bakery. However, value-added as a producer is limited. The high value-added activities along the cocoa beans value chain are processing, chocolate manufacturing and retailing. Farmers along the cocoa global value chain receive relatively low revenues. In 2015, it is estimated by Cocoa Barometer that farmers only get 6.6% of the total value added to 1 ton of cocoa beans that are sold. The International Labour Rights Forum estimated that the net earnings of typical cocoa farmers with 2 hectares of land in Côte d’Ivoire are about $2.07/day, which is just above the global poverty line of $1.90/day.

Good news is now African countries are more and more engaged in the role of processor in recent years. Ghana is now processing 34% of its cocoa beans. This is also reflected in the investment initiatives by leading firms in Ivory Coast. Barry Callebaut opened a new cocoa processing unit in Cote d’Ivoire in April 2019. It is expected to expand its processing capacity to more than 40% in this country by 2020.

Factors shape the structure

Located on the south coast of West Africa, Cote d’Ivoire has the perfect weather for cocoa trees growing. The natural environment is the prerequisite for it to be the leading cocoa beans producer in the world. It was not able to actively participate in the process stage due to the high efficiency of delivery required by the final consumption market, lack of motivation and huge initial costs.

Firstly, Short-life time of semi-produced cocoa beans requires just-in-time delivery to retail markets which are mainly in Europe. But the growing demand from the local chocolate market now requires more and more local processing. Secondly, Cocoa process is capital intensive which does not that helpful in solving the employment issue. For example, the new processing factory invested by Barry Callebaut in Cote d’Ivoire is only estimated to add 45 additional workforces (Barry Callebaut, 2019). Thirdly, high sunk costs of initial investment and the lack of financial resources of local SMEs discourage entering into processing stage. Last but not least, high energy costs and political instability are also obstacles to attract international investors and local entrepreneurs.

This situation is changing as the growth of the middle class in West Africa creates the potential for local and regional chocolate consumption. As mentioned above, Barry Callebaut sets the ambition to expand its processing capacity in Cote d’Ivoire. This expansion, on the one hand, fits the strategy of supplying emerging demand in African chocolate market due to the rising of middle-class people in West Africa; on the other hand, is in line with Cote d’Ivoire governments’ desire to grow local cocoa beans processing capacity. This is also confirmed by Antoine de Saint-Affrique, CEO of the Barry Callebaut Group: “This significant investment in our Cocoa processing capacities in Côte d’Ivoire is one more sign of our long term commitment to the country and to the African continent. Not only as a supplier of high-quality cocoa beans but also as an industrial base and as an emerging market for cocoa and chocolate consumption”

 Potential and Challenges in upgrading

There are four types of upgrading to increase competitiveness in global value chains: 

1) process upgrading

2) product upgrading

3) functional upgrading

 4) inter-chain upgrading (Humphrey & Schimitz, 2002)

Functional upgrading is defined as to increase the skill content of activities by acquiring new or superior functions in the value chain. In the cocoa-chocolate value chain, it is from being a cocoa beans producer to processor. One benefit is that low-quality cocoa beans that are rejected by the quality control process in the export process can be transformed into an exportable value-added product. Successful moving to processing stage canon the one hand, increase incomes for farmers and the nation; and on the other hand, create job opportunities by encouraging SMEs engaging in this process.

Being a brander (chocolate manufacturer) is also a potential, although it is more difficult due to the general low reputation of chocolate produced in Africa perceived by consumers, and the tight control of lead chocolate merchandisers. But these difficulties can be partly offset by the demand for handmade chocolate.

However, there are also many factors impede the process of achieving value chain upgrading, such as environmental deterioration, poverty, child labor. Challenges in economic upgrading and social upgrading are chosen to be discussed in detail.

 Challenges in economic upgrading

In 2015, Côte d’Ivoire was ranked 172 out of 188 on the UN’s Human Development Index and 46% of the population lives below the international poverty line of $1.90 per day. Despite being the fastest growing economy in Africa, many Ivorian farmers are still living in poverty. The average Ivoirian cocoa farmer makes 97 cents per day (World Bank, 2002-2015).

Lack of transparency is one of the major challenge faced by cocoa farmers to achieve economic upgrading. The market lacks transparency for them in access to reliable market information, such as prices and quality, whereas buyers have better access to such information (Deardorff & Rajaraman, 2009). This asymmetry of information perhaps results in the low price of cocoa beans offered by farmers. Although adopting new information and communication technologies help to improve the situation, the local government does not identify solving this issue as a priority. If it is not addressed, it is hard to increase income for farmers and to realize economic upgrading.

The second challenge is the lack of financial resources and support to small players. For a long time, purchasing prices from farmers in African producing countries can barely support a living wage for farmers. Their crop revenues are insufficient to afford reinvestments in their cocoa trees, farmlands or other productive inputs, thus they have to postpone or even cancel their investments plan. This is largely due to the difficulties in obtaining appropriate financial services and support such as cheap loans, health insurance, and seeding.

The difficulties for smaller players to compete with large corporations also creates the problem of increasing concentration in the cocoa industry both in production countries and consumption countries. Take the processing stage as an example. Processing adds more value than production in cocoa’s global value chain. Most of the processing activities are performed in the final retailer markets. To engage more in the processing stage, there is a need to support local players, especially SMEs. However, the high costs of finance, huge taxes on grinding activities and the increasing tariff on processed cocoa make it difficult for small payers to grow (Ecobank, 2014). This leads to a vicious circle and limits economic gains from participating in the global value chain.

Challenges in social upgrading

High level of illiteracy is one of the major challenges of social upgrading in Cote d’Ivoire. The lack of access and low-quality education in rural areas limits farmers’ abilities to understand good agricultural practices and how to build professional cooperatives. The low illiteracy level may also expose them to safety risks. Pesticides and fertilizers are harmful to health if they cannot handle it properly. The situation is even worse when it comes to child labor. A children’s workday begins at 6 in the morning and ends in the evening. The heavy working load hinders physical development, as well as personal growth due to the lack of education resources in the cocoa plantation.

Gender inequality is another social challenge in Cote d’Ivoire. Most of the farms are owned by men, women are usually working as family labor for their husbands and sons without any payment, even though they play important roles in the production. What is more, they cannot receive sufficient training or support. If not work in family farms, other producer organizations often have high entry barriers for women to join in. This reinforces the male-dominant situation in the industry and makes it even harder for a female to get access to financial resources such as loans.

 Interventions

There are four typical roles of the state within global values chains: 1) facilitator, 2) regulator, 3) producer, and 4) buyer. Two of the rules are suggested to take by Cote d’Ivoire: facilitator and regulator. Examples of the facilitator are tax incentives, favorable trade policies. Examples of the regulator are price controls, trade policies, quality controls. The following content is the specific policies nations can take as roles of facilitator and regulator.

 Adopt new technology to increase transparency

Actions built on a more transparent mechanism for all stakeholders need to be taken by the government. Lessons can be learned from Cameron, the improved access to information such as quality requirement, customer demand, and price trend helped farmers to make better production and investment plan, this has contributed to the higher bargaining power of farmers in negotiating the price with traders.

Projects dedicated to helping SMEs and farmers receive up to date information should be promoted. For example, cooperate with some agencies or non-profit organizations to provide real-time price change, demand trend, weather, and natural disaster forecast information. New systems and technologies can be applied to increase transparency. For example, receive voice messages giving real-time information in the market on the phone.

Improve farmers’ access to financial resources

As we already discussed above, one challenge in achieving economic upgrading is the lack of access to reliable financial resources and support. What is more, the increasing demand for cocoa and chocolate products in African countries due to the growth of the middle class creates opportunities for domestic processors and manufacturers and even retailers. A recent investment in a chocolate factory in Côte d’Ivoire targeting West Africa’s growing middle-class consumer market is a reflection in this trend (Gayi & Tsowou, 2015). This requires favorable development policies for SMEs.

One policy is to facilitate farmers’ access to finance and price risk management instruments. This can be achieved by setting an incentive system that lower financial costs and promoting impact finance in banks. Experiences can be acquired from Malaysian cocoa industry. It has successfully shifted from high dependence on exports of cocoa beans to perform higher value-added activities today, and involve many local entrepreneurs in this process. One enabler for Malaysia to achieve this is it incentive systems for SMEs, including tax allowance for investment and local processing.

Conclusion

The big potentials to capture more value-added activities rather than production in cocoa-chocolate GVC is not only for Cote d’Ivoire, but also for other African cocoa bean raw material suppliers. Despite various challenges faced, the growing local and regional chocolate consumption markets in West Africa are attractive to FDI to set processing factories locally. Favorable policies government can make are helpful in addressing these challenges as well, and in turn, achieve higher economic and social benefits.  

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