An article by Equal Exchange
(all photo credit: Equal Exchange)
Saul Diaz Ruiz of ACOPAGRO co-op in Peru putting diseased cacao pods in the cart.
While cocoa and chocolate are beloved products for many of us, they have been receiving attention lately related to a global shortage, and the causes and consequences linked to this shortage, including a spike in prices on grocery shelves.
We at Equal Exchange want to share some inside perspectives about what’s happening in the cacao world, including how climate change, commodity markets, and alternative fair trade supply chains interrelate. It’s also an opportune time to focus some deserved attention on cacao farmers.
First, a little clarification about the vocabulary used in this article:
Cacao: the agricultural product that is what farmers grow, harvest and sell, from the Theobroma Cacao tree. The cacao beans later get processed into different parts, primarily chocolate liquor (a.k.a. cocoa mass) which can then get further processed into cocoa powder and cocoa butter.
Cocoa: the term often used for cacao beans once they have been processed or sold. In Africa, the term cocoa is typically used instead of cacao at all stages of the value chain.
Chocolate: a food made from ground, roasted cacao beans, plus other ingredients.
When we refer to the global cocoa market, we are referring to people buying and selling cacao beans that have typically been fermented and dried; at that point, they are called cocoa beans. Of course, this initial ingredient will ultimately get transformed into countless other ingredients and end products, but this story begins at the farm.
SHORT SUPPLY
Around 70% of the world’s cocoa beans come from West Africa, mainly the Ivory Coast and Ghana, and their most recent main harvest was not good. Three primary factors collided:
Serious agricultural diseases are harming cacao trees and decreasing harvest outputs. This harvest year, black pod disease and swollen shoot virus are contributing to significantly lower yields.
Atypical climate patterns can disrupt farm productivity in general, but in this case, they have also unfortunately exacerbated the diseases and their damage. The harvest season has had both too much rain and not enough rain at different key moments in the cacao growing cycle.
Many farms are aging and have not been reinvested in adequately over time. Even under good conditions, older trees produce less cacao per tree. Farms with poor investment mean depleted soil and less healthy trees, making them even more vulnerable to agricultural pests and weather challenges.
This year’s poor West African harvest comes on the heels of two previous years of deficit supply, compounding the strained supply in the global market and raising fears of sustained supply problems. While this might feel like an acutely current problem, one can argue that the problem stems from historically entrenched challenges in the conventional system such as low market prices and low farmgate prices paid to farmers, which perpetuate the lack of resources and capacity to invest properly in farm maintenance and upkeep. Pair that with climate change and it is hard to imagine a quick return to stable, predictable healthy harvest yields globally.
Market prices
Just like corn, wheat, and soy, the vast majority of cocoa beans are bought and sold on the commodity market. Conventional cocoa is contracted according to the current market price and is subject to the free market swings of supply and demand. So typically, when the supply of cocoa beans goes down, the price goes up.
1 Year Cocoa Futures in US Dollars per Metric Ton, showing the unprecedented surge in prices.
At the start of 2023, the general commodity price of cocoa was about $2,500/MT (Metric Ton). In April of this year, the commodity market peaked at close to $12,000/MT. At the writing of this article, it has since come down to the $7,000-$9,000 range, but that is still in the range of a minimum of 200+% increase, and part of the problem is that there is no surety that it will stabilize even at this range.
The commodity market also operates on speculation in the form of futures contracts. Based on the low supply, the futures market went into hyperdrive with speculators predicting that this year’s supply out of West Africa and other major producing regions will continue to be low. Hedging, competition, and greed continue to perpetuate these price hikes.
What does this mean for consumers?
Because high cocoa prices affect all players in cocoa and chocolate supply chains, including exporters, manufacturers, and confectioners, costs are rising for everyone and typically compound as they go farther along the supply chain from the farm to the market. Consumers will expect to pay more on the shelf for their favorite products. Some companies may run out of chocolate. Others may try to manage their costs by changing recipes to reduce how much cocoa is actually in the product relative to other cheaper ingredients or fillers. Some companies may shrink products to a smaller size.
What does this mean for farmers?
The governments in Ivory Coast and Ghana set annual farmgate prices to farmers in those countries. Unfortunately, those prices were set before the commodity price skyrocketed, so higher prices in those countries do not necessarily mean more money in farmers’ pockets. The governments in both countries have raised prices more recently in response to this unprecedented market, but these prices are still far less than the market price and far less than what farmers are getting in other countries. At the same time, because the original cause of the high market price was the low harvest yields, even if farmers are getting paid more per pound than in past years, it is on a meaningfully smaller total amount of pounds of cocoa.
Farmers outside these countries are making more money for their cocoa if they are currently in a harvest period. This hopefully offsets lower production volumes due to events that are outside their control like climate change and crop disease.
Ivan Cruz of ACOPAGRO co-op turns and evens out the cacao during the fermentation process.
Organic, fair trade, and Equal Exchange
Equal Exchange is one of a few companies who work in an adjacent market, trading according to organic and fair trade principles to support higher prices to farmers and systemic investments in farming communities. Equal Exchange’s goal is to change power dynamics through long term trade relationships, cooperative and democratic participation, and a more equitable distribution of the money that flows through the supply chains that we’re a part of. Our focus is to invest in farming communities that are typically excluded from traditional supply chains, to build alternatives together and to create products that give consumers the choice to purchase according to their values.
Our commitment to organic has meaningful impacts in this context as well. Organic cultivation focuses on a more holistic approach to healthy farms and healthy communities. Many of the producer groups we work with have invested in dynamic farming systems that rely less on added external inputs (chemical-based pesticides and fertilizers) and more on creating their own inputs from their farms—using byproducts from cacao farming and gardening to create their own organic composts and natural fertilizers. They use native plants to help with pest control and nitrogen fixation. They save their best seeds and cultivate seedlings from those, to continue to invest in planting young, hearty trees. The focus is on more of a self-sustaining layered system, rather than focused only on maximizing outputs for a short period. The attention to soil, tree health, water systems, and erosion control makes for plants and farms that are better prepared to withstand disease and weather disruptions.
Photo left, farmer Indalecio Ceaico Vilca leads Equal Exchange staff on a tour of his cacao farm on a recent trip to APROSAROCH co-op in Peru. Fruit trees are often integrated into cacao farms, yielding a variety of fruits. On the right, a large jackfruit is shown, being held by Lourdes Falen from Equal Exchange while standing next to Claudio Henry Morveli Sullon from APROSAROCH.
Another benefit to these holistic, organic farming systems is that many of the producers we source from farm their cacao among other crops, including fruit trees, hardwood trees, and other garden crops. Generally speaking, diversified farms like this, versus monocrops, are better for the surrounding environment, flora, and fauna. It also means that farmers can have more diversified income streams. While cacao prices may be high at this moment in time, the historical ups and downs of commodity markets mean that a downturn for cacao is likely in their future, and diversified farms help farmers be resilient, not by luck, but through planning for medium- and long-term economic needs.
Our cacao cooperative partners are always guaranteed a fair trade minimum price which, with additional organic premiums, adds up to a minimum of $2,940/MT. Traditionally, we source well above that minimum. In 2023, for example, the average price paid to our cooperative partners for cocoa beans was over $4,000/MT. Now that the general commodity price is so far above even our past organic, fair trade price to farmers, we continue to commit to paying above the commodity price.
The majority of the cacao that we source comes from Peru and the Dominican Republic. For Equal Exchange’s producer partners, this year’s harvest will likely be mixed based on climate issues in the different production regions—some harvests will be down while others are expected to be quite good.
Given the global bean shortage, with some buyers wanting to get supply from places they’ve never turned to before, there is a lot of competition from new buyers at origin. This is true for our producer partners. This is certainly a time when our long-term relationships pay off. Our producer partners continue to work with Equal Exchange, as we have worked with many of them through countless ups and downs—market swings as well as other challenges. Thankfully our track record matters: paying above-market prices, reliable follow-through on commitments, and in many cases, investment in development projects that extend beyond our purchases. All that said, it is critical that our farmer partners continue to receive competitive prices, both so that they don’t lose out by working with us, and so that we don’t get undercut by other buyers.
Waldemar Gomez Tarazona of the Dos de Mayo Committee of ACOPAGRO co-op pruning cacao trees in Peru.
Managing risk
Each supply chain—for cocoa powder vs. chocolate bars vs. chocolate chips, for example—is unique. However, a universal tension in all the cacao supply chains is the competing interests of securing supply, which is likely to be at a high cost, and the desire to not overbuy at high prices, only to have the market come down and be saddled with product that can no longer be sold at a price that covers the cost and needed margin. Everyone is making their best strategic guess at striking the right balance in securing inventory amounts and prices. It’s simultaneously risky to buy too little or too much while the prices are so volatile.
Another universal stress is financing. Most businesses, from farm co-ops to manufacturers, generally function based on balancing the costs and timing of when they pay for their own costs versus when they get paid for their end product from their customers. In this case, almost everyone in the supply chain is needing to spend way more—two, three, four, or more times their usual cost—to secure what they need. But they then have to wait the usual amount of time to get paid by their own customers. Many players in the supply chain are, therefore, facing the unexpected and acute financial strain of needing way more cash on hand to pay for their inputs.
This situation is incredibly challenging for the farmer co-ops that we work with. The co-op buys the cacao beans from many (sometimes hundreds of) individual small scale farmers. The co-op then collects and aggregates those smaller amounts of cacao to then in turn sell to international buyers at the larger quantities that the buyers need. The co-ops need to pay their farmer members immediately upon buying the cacao from them, but the co-op itself often may have to wait months to get paid for their contracted beans. Securing enough cash upfront to buy the cacao from farmers at that first step is proving to be quite a challenge.
A further risk unique to farmers is that cacao has become quite suddenly very valuable, and theft is a very real concern at the farms, co-ops, and collection centers. Security for both the products and the people are a growing priority.
Positive news
In certain supply chains, including ours, higher prices will help small-scale farmers and their families. In our alternative supply chain specifically, because we work with farmers organized into co-ops, payments don’t just go to individual families, but also to programs that benefit farmer communities. For farmers, farm health and productivity are the key not just for income today, but for years and generations to come. After over a decade of low prices that were challenging for them, this period of higher prices offers them a chance to re-invest and stabilize for an uncertain future.
Because Equal Exchange partners with organic, fair trade farmers, these farmers also serve as important stewards of their lands and surrounding ecosystems. The current cacao shortage is a reminder of how vulnerable crops and supply chains can be to unpredictable weather patterns. Equal Exchange supports farmer co-ops who are actively working to manage land in sustainable ways.
While we can’t foresee what the cacao market will look like in a year or 10 years from now, we are committed to working cooperatively with our customers and our farmer partners to be informed and engaged participants in an alternative food system. There are many inherent challenges in our food system, in chocolate and beyond, but there are also reasons for hope, and daily opportunities to take action. The model and spirit of co-ops also create a space for collaboration and creativity to build upon existing solutions and to continue to forge new opportunities.
Equal Exchange’s visit to ACOPAGRO co-op in September, 2019.