Leaving a bitter taste

Edition 26. The troubled supply chain of chocolate

Tetteh Quarshie was born to a poor farming family in South-East Ghana. A hard worker, his industriousness led him to become a blacksmith; the first in his town.

His rise gave him an opportunity to visit the island of Fernando Po in South America from where he returned 6 years later with a few seeds hidden in his blacksmithing toolbox. The year was 1876, Tetteh had visited the islands now known as Equitorial Guinea which were a Spanish colony then.

Spain, courtesy Christopher Columbus, was the first European trading nation to discover the joys of a certain South American bean - cocoa. Having seen its demand rise rapidly across Europe, mass plantations were cultivated in large swathes of Central and Southern America.

In 1876, breaking the existing law, the legend goes that Tetteh successfully got 6 beans back to his hometown. Those 6 beans changed the lives of billions. Starting from those seeds, West Africa – mainly Ghana and Ivory Coast- has become the driving engine of the chocolate industry. Over 2 million farmers in these two countries cultivate cocoa, producing 60% of the global supply.

COVID-19 has thrown their lives in jeopardy. Worse still, the blowback is not limited to the farmers alone, their children are impacted by this too. Let’s look at the murky world behind confectionaries and discover a colonial-era supply chain, a failed cartel, and the ways in which COVID-19 will shape lives for years to come.

To understand the root of the distress, it is imperative to understand how the supply chain of cocoa works.

Theobroma Cacao is a small evergreen tree whose fruits are first transformed into cocoa liquor and then into cocoa butter or powder for producing chocolates, cosmetics, and other items. The chocolate industry is expectedly the largest user of the crop, consuming ~50% of the annual produce.

Chart showing the stages of production of cocoa

Despite the widespread popularity, the crop has not experienced widespread mechanization and that might be due to the region where most of it comes from.

Over 90% is sourced from smallholder farmers who own less than 5 hectares of land, making any effort of mechanization uneconomical given the required investments.

Small farmers also expectedly get the short-end of the economic bargain. Much of the value in the industry is captured downstream with large scale processors and sellers. Consider the breakup of the price of a premier Dutch chocolatier.

The chocolate industry is valued at ~$110B but only 6% of that value goes to the farmer. Cocoa constitutes half of all the exports from the Ivory Coast but in turn, a country with 46% of its population below the poverty line ends up earning a pittance ($5B). A similar situation plays out in Ghana which supplies one-fifth of all cocoa beans but earns less than one-fiftieth of the value of the chocolate that is sold.

The living wage of the farmer in West Africa is pegged at $2.7/per day. As of today, the farmers earn only a fourth of that - $0.7/day.

So, there is a perfect storm of smallholder farmers earning a pittance, unable to invest in mechanization and increase productivity, and the supply chains capturing the majority of the value in the global north. What do the farmers do to support themselves?

Many employ their children in their plantations.

The West African belt is racked by issues of children working in their family farms carrying out often hazardous tasks. The last estimate pegged the number of child laborers in the region at 2.1 million.

To understate the situation, the supply chain for cocoa is messed up.

And there was the coronavirus

14 of the top 15 countries in per capita consumption of chocolate are in Europe. An average Swiss consumes ~9 kgs of chocolate annually. A Brit consumes close to ~8 kgs (for context, an average Indian consumes only ~0.2 kgs annually). This chart is a good summary of the colonial trappings of the crop.

As COVID-19 induced lockdowns across Europe and duty-free spend crashed (read: Airport Toblerones), the global demand for chocolate plummetted sending the cocoa price in a tailspin.

Line chart of New York cocoa price ($ per tonne) showing Cocoa price melts

The tortured troubles of a chocolate cartel

Wishing to capture a greater share of value in the cocoa supply chain, Ghana and Ivory Coast moved to set up COPEC.

What is COPEC?

It is OPEC (the cartel of oil producers) for cocoa.

The logic is compelling. If OPEC can control the oil prices while commanding only ~35% of global supply, why can’t the countries that produce ~60% of global produce control the price of cocoa?

The COPEC countries imposed a $400 premium per metric ton of cocoa to pay the farmers better by guaranteeing a minimum price. The proposal while reluctantly accepted by the large chocolate companies had a few issues.

One, OPEC works because the countries can reduce the oil supply if the price gets too low. That can’t be done for a crop that grows on trees after a long period of planting. Two, farmers earning from cocoa are among the poorest globally, there are ethical concerns in controlling supply when greater harvest in response to high price offers them a chance to increase their income. This is exactly what has played out. The production in Ivory Coast jumped over the last four years in response to increasing cocoa prices as farmers cleared more of the rainforests to plant cocoa trees.

Now with the cratering demand, all the calculations are off. There are signs that the market has already adjusted and is offering lower prices to account for the premium.

Leaving a bitter taste

Reduced consumption of chocolate and the knock-on impact on cocoa prices will hit farmers hard. Barely surviving on the right side of the line of sustenance, their incomes will fall. Second-order effects include increased incidence of child labor and resultant drop-off from school. A sample survey by the International Cocoa Initiative has confirmed these fears. Over half of the surveyed participants reported a decrease in income and there was a 21% increase in the incidence of child labor.

What is the way out?

Unfortunately, there are no easy answers. The way forward might be farmers moving away from cocoa and planting a variety of crops to diversify their income streams. Consumer pressure has led to initiatives by large chocolate processors to better support farmer incomes, and work towards eliminating child labor from the supply chain. This consumer pressure must sustain (along with a willingness to pay a higher price).

Here is to hoping that over the medium term, COVID-19 creates a better life for millions of unseen farmers whose tireless work brings joy to billions every day.

In other news

Microsoft wanted to acquire a small stake in TikTok. The quest turned into a global soap opera. Why?

Interesting Yelp data showing that in places where consumer interest in going out increased, the COVID cases spiked there soon after.

We would lose a part of our identity, and the future generations would miss out on a cultural artifact of the 21st century if Facebook were to shut down. An interesting analysis on what happens if Facebook shuts down.

This hurt.

That’s all for the week. If you enjoyed the post, do share it! The encouragement keeps me going. Write to me at romitnewsletter@gmail.com, Twitter, or leave a comment. Stay safe!

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