7. Cocoa

Cocoa butter substitutes threaten the livelihood of cocoa farmers

For many Third World countries cocoa is, and has been, an important export commodity. However, this might not remain the case for much longer. It is now possible to replace the cocoa butter in chocolate with other cheaper fats. Whether, and how much cocoa butter will be found in chocolate in the future is not a technical question but a political one. The harmonisation of food law has made this question a point of contention in the European Union.

As long as cocoa butter remains an important ingredient of chocolate, the chocolate industry depends on cocoa bean imports from such equatorial countries as the Ivory Coast, Brazil, and Ghana. This dependence is one reason why sweet manufacturers are interested in using vegetable fats other than cocoa butter in the production of chocolate. The fact that cocoa butter is considera- bly more expensive than either palm oil or rape seed oil is another reason.

7.1 Low prices on the cocoa market

World market prices for cocoa are determined by supply and demand. Between 1985 and 1992, world cocoa production far outstripped demand and prices dropped accordingly. Until the middle of the 1970s world cocoa production was only about 1.5 million tons per annum. Ten years later, it was 2 million tons, and production continued to increase until, in 1990/91, the harvest reached a record level of 2.5 million tons. This increase in production was largely the result of the high cocoa prices in the 1970s. In 1977, the price climbed to over 3.000 £ per ton on the London futures market. In the 1980s, however, prices fell. The high profit-margins of the 1970s had served as an incentive for cocoa farmers to produce more beans, and so by the end of the 1980s huge surpluses had accumulated which had to be stockpiled. By the end of the 1990/91 season, 1.6 million tons of cocoa had been accumulated, equivalent to 67% of the total quantity processed in that year. As a result of this surplus, prices dropped. In June 1992, the world market price for cocoa reached its lowest level in 16 years. In 1993, the price was only US$830 compared to the early 1980s when prices varied from US$1,500 and US$2,000 a ton. The International Cocoa Agreement signed by producer and consumer countries had no influence on the situation. Because of the accumulated stocks, the chocolate manufacturers were in a position to dictate prices. They bought large stocks when prices were low, and used them up during periods of higher prices.

In the past few years the situation has eased a little. As a result of the lower prices, many farmers put less effort into the cultivation of their cocoa trees. As a consequence, since 1991/92, fewer cocoa beans have been harvested and stocks have depleted, leading to renewed price increases. In 1994, cocoa prices climbed sharply, but fell again at the end of the year. Although price fluctuati- ons are largely dependent on the volume of beans harvested, they become more pronounced as a result of speculation. At present, cocoa is trading at between US$1,200 and US$1,300 per ton, which is still below the level of the 1980s. These are of course not the prices which are paid to the cocoa farmers. Intermediaries also require a profit and because most small farmers depend on them to buy their crop, the intermediaries are in a powerful position and can depress prices even further.

 

Turnover of big chocolate companies in 1993

 

	total turnover in billion US$	turnover in sweets in billion US$
Nestlé	40,5	6,0
Mars	9,3	4,0
Philipp Morris/ Jacobs Suchard	60,9	3,5
Ferrero	3,5	3,5
Cadbury	6,2	2,5
Hershey	2,0	2,0

Takeovers in the chocolate industry

Today the chocolate and sweet market is dominated by a small number of multinational corporati- ons. In the USA, Mars and Hershey are dominant with a US market share of 75%. Between them, the Swiss Nestle combine (which has also gained a foothold in the UK by taking over Rowntree), Jacob Suchard (which has become a subsidiary of Philip Morris), Mars, Cadbury, and Ferrero share two thirds of the European market. The chocolate market is very competitive - Nestle spends more money on advertising than on wages and social expenditure. The big combines vie with each other to increase their market share by taking over smaller enterprises, and in recent years, Nestle has been particularly acquisitive. Between 1989 and 1993 Nestle took over a total of 38 companies. Because these few corporations are the major purchasers of raw chocolate ingredients they have the power to depress prices or to increase quality specifications, especially when supplies are plentiful.

By estimating crop yields, the development of demand, and market trends, market speculators gamble on future prices of commodities. They are able to manipulate prices by buying and selling, and price fluctuations thus become more pronounced. Trading in these so-called options is very popular, since less money is needed than for actual transactions. Trade in options is one of the main causes of the fluctuations of commodity prices at the stock exchange. How attractive this business is for speculators can be demonstrated by the fact that the trade in options exceeds the real cocoa trade by between six and nine times.

7.2 Cocoa production in the Third World

Cocoa is very important to many West African countries. Some states in this region depend on cocoa for the major part of their foreign exchange, although it has lost some of its importance as a result of the price recession of recent years. The sales revenue from cocoa still amounts to more than 40% of Ghana's total export earnings, and in the tiny country of Equatorial Guinea, accounted for 65% of foreign exchange in 1987. Such dependence on a single commodity can prove disastrous when prices fall. Debt and interest on debt cannot be paid and there is little chance of improving the situation. Asian countries which produce cocoa are less dependent on cocoa exports because of their more diversified economy.

Most cocoa is exported from producer countries in the form of beans. Cocoa is only processed on any significant scale in Brazil and in the Ivory Coast. Between 1985/86 and 1987/88 about 236,000 tons of cocoa were processed in Brazil and 120,000 tons in the Ivory Coast. In Brazil, about one fifth of the total cocoa production is consumed at home. However, there is little home consumption in the other leading producer countries.

With the production of 884,000 tons of cocoa in 1993/94, the Ivory Coast is the world's leading cocoa producer. It is followed by Brazil, Indonesia, Ghana, and Malaysia. These five countries between them produce 75% of the world's cocoa. While cocoa production is more or less stagnant in the West African countries, in Malaysia and Indonesia, output is still growing.

Significance of cocoa

* Figures do not contain plantation workers
Source: ICCO, Quarterly Bulletin of Cocoa Statistics, 1994.

Cocoa grindings 1993/1994 in 1000 tonnes

Source: ICCO, 1994

Cocoa production 1994/1995 in 1000 tonnes (forecast)

Source: ICCO, Quaterly Bulletin of Cocoa Statistics, 1994.

Cocoa production per continent

West Africa

In West Africa, about 1.2 million small farmers' families earn a living by growing cocoa on farms with an average area of between 4 and 5 hectares. As the proceeds from the crop are crucial to the small farmers, they cultivate their cocoa trees carefully and take great care with the harvest. In West Africa, fermentation and drying of the beans is a labour intensive process. The pods are chopped open and the beans scraped out by hand. The beans, which are still white at this stage are piled up and covered with banana leaves. There they stay for several days while they undergo a transformation during which they gain their brown colour and characteristic flavour. The beans are then spread on the ground and dried in the sun so that they can be stored and transported. The fermentation and drying processes are fundamental to good quality cocoa and, since in West Africa all this is done with great care, it is here that the best quality cocoa is produced. Since the end of the 1980s, there have been no attempts to expand production in this part of the world.

Yah Paul lives in Binao, a small village in the western part of the Ivory coast. He owns a small plot of land of about 100 metres by 150 metres, where he grows bananas and cocoa. Yah works hard and his plot still looks good, compared to those of his neighbours. Cultivating cocoa trees in the region is no longer a profitable occupation. Since the national cocoa buying institution of the Ivory coast, the Caisse de Stabilisation, cut the prices for cocoa by half to 200 CFA Francs per kilo in 1990, Yah can no longer afford pesticides and fertilisers. Consequently, the yield from his trees has decreased and he cannot pay school fees for his two daughters. At present he has no money at all, so he and his family have to survive on what will grow on the land around his hut - bananas and a few cassavas. Although there is a local co-operative, Yah has little choice but to sell the next cocoa crop to a middleman, a Lebanese businessman, who pays cash. The price the middleman pays is considerably lower than that of the local co-operative, but Yah would have to wait longer for the money from the co-operative. Yah cannot afford to wait.

Asia

Malaysia and Indonesia came into cocoa production quite late. Encouraged by high prices in the 1970s, these countries stepped up production and are today among the leading cocoa producers. Together they hold about 20% of the world market. Whereas Malaysia has signed the Fifth International Cocoa Agreement and has no wish to increase its cultivation area, Indonesia is still seeking to expand production. Rain forest is being cut down to give new settlers the opportunity of cultivating cocoa. An estimated 400,000 hectares of Indonesia is now in cocoa production, and experts expect that in the year 2000 Indonesia will produce over 500,000 tons of cocoa, and will thus have nearly doubled its production in five years. This determination to expand is at odds with the efforts of other cocoa growing countries to stabilise prices by limiting production.

The average cocoa plantation in Malaysia covers some 260 hectares. Plantations under foreign ownership may be as large as 430 hectares. Cultivation is more intensive than in Africa , the yield being about 2000 kg of beans per hectare compared with some 500 kg per hectare in West Africa and South America. These high yields are achieved by production methods involving monoculture with high fertiliser and pesticide input. If safety provisions for the use of pesticides exist, they are generally ignored. The health of plantation workers is threatened and environmental pollution increases.

Falling world market prices mean that such chemical-intensive cocoa production is no longer profitable. In 1992, production costs on Malaysian plantations were US$1250 per ton while the harvested crop fetched less than US$1000. Today, cocoa production costs in Malaysia continue to exceed prices. The Malaysian government no longer promotes the cultivation of cocoa and has now taken steps to restrict it. A significant reduction will be hard to achieve in the short term, since many of the trees planted in the boom years of the 1970s are only just reaching maturity.

It is mostly women who harvest cocoa. They carry the pods to depots where they chop them open and take out the whitish beans. After fermentation and drying, the beans are packed in 40kg sacks which the women drag to the main road - a distance of a kilometre or more. The women's' work is hard and risky. It affects their hands and their backs, and they are also exposed to insect and snake bites. As medical care is less than adequate ( antidotes for snake bites are not available and doctors are inadequately trained), these risks can have serious consequences for the women's health. Officially plantation workers work a 48 hour week. In fact, if they fail to do the required stint, they are locked out for three days. They are paid by the quantity of beans they deliver. If they are unfit for work, they receive no pay at all, and since the workers live in accommodation provided by the plantation, if they lose their job they lose their homes too. There is little opportunity for children to go to school and indeed, some 50% of children over twelve work on the plantation.to help supplement the family income.

7.3 Trade restrictions: GATT and EU regulations

There are two reasons why it is mainly the cocoa beans or the slightly processed products such as cocoa butter which are exported by producer countries. One is the lack of technical equipment and know-how in the respective countries. The second reason is that industrialised countries find ways of protecting their markets against imports of manufactured products - the higher the degree of manufacture, the higher the tariff rate. Whereas the European Union raises a tariff of only 3% on cocoa beans, the tariff on cocoa butter is 12% and that on cocoa powder 16% (These tariff rates do not apply to products from ACP countries). The conclusion of the Uruguay Round of GATT, i.e. the ratification of the GATT agreement in 1994 had a negligible influence on the cocoa trade. There was neither a reduction in tariff rates nor a harmonisation of tariffs for ACP and non-ACP countries.

Substitution of cocoa butter

Various factors will influence the future development of cocoa bean prices. In December 1994, headlines suggested that 'Prices will climb to 3.000 or 4.000 £'. This information was based on the twin assumptions that production would stagnate, and that there would be swift economic development in East European countries. Neither of these assumptions proved to be true. This dubious prediction of higher cocoa prices may well have served to exert additional pressure on the members of the European Parliament to put through the planned directive which would allow the use of fats other than cocoa butter in the manufacture of chocolate. The Directorate General III (industrial affairs) of the European Commission is currently drafting such a directive in order to harmonise the different national regulations which exist within the EU. Today, most member states do not allow the use of fats other than cocoa butter and milk fat in the manufacture of chocolate.

However, this 'rule of purity' does not hold for the UK, Ireland, and Denmark, or in the new EU member states of Sweden, Austria, and Finland. In these countries, substitution of butter by other vegetable fats (up to 5% by weight of chocolate) has been allowed since the 1950s. As cocoa butter is just one of several ingredients of chocolate, on average 20% of cocoa butter may be replaced by substitutes. The discussion about the use of substitutes in chocolate has been going on for many years. When the UK, Ireland, and Denmark joined the EEC in 1973, a transitional regulation was put in place allowing the cocoa butter substitution policy of these countries to continue, with a view to the eventual harmonisation of regulations.

The longer this harmonisation has been delayed, the greater discontent is expressed by chocolate manufacturers in the countries of mainland Europe, who feel they are subject to discrimination in not being allowed to use substitutes.. The chocolate industry lobbyists are pushing for harmonisation at 5%. The EU has yet to reach a consensus on the matter, and may well decide to delegate the decision to national governments. This would almost inevitably lead to the 5% regulation being adopted by all states since none would wish to see their own industry disadvantaged.

It is not only the fact that substitutes are cheaper which leads to the chocolate industry's interest in changing the present regulations. Automated production processes and new chemical technology play increasingly important roles in the manufacture of chocolate. The substitutes, which are made from common commercial fats such as palm, soybean, or rape oil by enzyme controlled processes, have well defined chemical characteristics. This means that they can be used to manufacture chocolate with specific properties, such as resistance to melting. The chocolate industry argues that such a chocolate could increase sales during the summer season, and perhaps also open up new markets in warmer countries. (Although whether countries with warmer climates either want or need chocolate remains to be seen.)

If the EU 'rule of purity' is abandoned in favour of the chocolate industry, the effects on cocoa producer countries will be disastrous. According to estimates by the International Cocoa Organisa- tion, ICCO, between 130,000 and 165,000 tons of cocoa beans could be quickly substituted by other cheaper fats. In the long run, as much as 180,000 tons could be replaced. As the USA would probably adopt the regulation as well, the demand for cocoa beans would be further reduced. According to the ICCO, demand would fall by a total of 200,000 tons, which is equivalent to 10% of world cocoa production. This would have a lasting negative influence on the world market. Cocoa prices would fall again due to excess supply, many producers would be unable to sell their crop, and the miserable living conditions of many farmers would deteriorate still further. (Even as things are today, many farmers have great difficulty in paying school fees, doctors' and hospital bills.)

With scant regard for the effect on cocoa producers, the World Bank still supports projects designed to promote cocoa production under Structural Adjustment Programmes. The intention of such programmes is to help poorer countries step up their development by earning foreign exchange. Only the chocolate industry and the fat industry stand to gain from the new directive. The chocolate industry will make chocolate using the new cheaper substitutes while charging the consumer the same price as before. For the fat industry it will mean a whole new market for their products.

In 1960, the big cocoa producer countries (The Ivory coast, and Brazil) met for the first time to discuss measures to stabilise prices. After ten years of negotiation with consumer countries, an agreement was reached to establish buffer stocks. In the event of an imminent fall in price, these buffer stocks would receive the surpluses in order to stabilise fluctuations in the world market price. The agreement provided for the common funding of these buffer stocks by producer and consumer countries. Price statistics, however, show that the buffer system has never worked properly, and indeed that it was doomed to failure from the start. As long as there are producer countries like Indonesia which are intent on expansion, falling prices cannot be halted by buffer stocks. Buffer stocks are an appropriate way of reducing annual cyclical fluctuations, but they cannot prevent price recession caused by a structural surplus. The most recent cocoa agreement which was ratified by the EU in February 1994, decided to give up instruments such as quotas and buffer stocks that support prices directly. Instead, the aim is to reach a balanced development of supply and demand through an internationally co-ordinated plan of production control. Additional- ly, the agreement calls on producer countries to reduce producti-on and on consumer countries to increase consumption of cocoa. It was also agreed that, because the buffer stocks have not been utilised since 1990, they will be phased out. In the course of the next five years, the stocks (which still amount to 160,000 tons) will be released onto the market in small quantities. In view of Indonesia's determination to further expand its production and the EU plans for cocoa butter substitutes, it seems likely that a balance of supply and demand will be difficult to achieve.

7.4 Fair Trade

In the commercial cocoa trade, the trading organisations and the chocolate industry receive about 70% of the profit from chocolate whereas the cocoa farmers (who usually have no alternative source of income) receive only 5%. The European fair trade organisations pay fair prices and support sustainable cultivation through establishing contacts with producers in developing countries. The sale of fair trade products also provides a link between producers and consumers. When consumers become more aware of Third World issues in general, they are more prepared to pay a fair price. El Ceibo, a Bolivian cocoa co-operative, established contact with the Swiss organisation OS3 in 1985. Some of the cocoa produced by El Ceibo is sold directly by OS3 on the European market.

Intermediate traders are avoided and the first stages of processing are carried out in Bolivia. (El Ceibo produces both cocoa butter and cocoa powder in its simple processing plant.) In 1991 OS3 placed the first fair trade chocolate on the European market. This 'Mascao' chocolate is produced by a Swiss chocolate manufacturer and consists of fairly traded cocoa from El Ceibo and fairly traded cane-sugar produced by Alter Trade, a co-operative in the Philippines. The fair trade organisations have to balance El Ceibo's need for a fair price to allow investment in the co-operative by buying trucks, storage capacity, and processing plant; with their own require-ment to sell the chocolate at a price acceptable to European consumers. Fair Trade organisations pay US$1.850 per ton, which is between 50 and 100% more than the world market price of recent years.

Since 1993 there is also a fair trade mark for chocolate in the Netherlands and in Switzerland. Chocolate producers who import cocoa under fair conditions may then market their products with the Max Havelaar label. This means that conventional retailers can participate in fair trade and it gives consumers better access to fairly traded products. Many supermarkets now sell both fairly traded coffee and chocolate. Three further fair trade cocoa co-operatives have recently been established in Ecuador, Ghana, and Sierra Leone. Transfair, the German fair trade mark organisati- on is currently negotiating with chocolate makers in Germany and the first German chocolate with the Transfair mark is expected to appear in the shops in the spring of 1996.

According to legend, El Ceibo is an immortal tree growing in the rain forest. It is also the name of a co-operative in the region of Alto Beni, which extends over an area of about 250,000 hectares in the Amazon basin of Bolivia. The co-operative was founded in order to break the middleman's monopoly over transport and trade, and so that the producers could take both the processing and marketing of cocoa into their own hands. Within a short time, a depot and a drying plant were established and, later on, a simple cocoa processing plant was built. This was the first time ever that cocoa producers had manufactured their own produce. They now produce cocoa powder, cocoa butter, and even their own chocolate. In 1987, El Ceibo started to change the larger part of its production to organic cultivation, and since 1988, certificated organic cocoa has been sold. Today, about 80% of the 700 members of 36 co-operatives produce organic cocoa. In 1994/95, Fair Trade organisations paid an average of US$1,850 per ton to the co-operative (compared with a world market price of US$1,000). How are the profits used at El Ceibo? - El Ceibo grants an allowance for children's school fees. - All members have health and accident insurance. - Investments in trucks and processing plant ensure that co-operative members are no longer dependent on middlemen. - El Ceibo operates several consumer co-operatives, where all kinds of goods are sold at fair prices. - El Ceibo operates a cocoa tree nursery and carries out research on alternative cultivation methods. - El Ceibo also carries out diversification programmes in order to achieve lesser dependence on cocoa for export earnings.

Lobbying activity

As well as promoting fair trade, the EFTA organisations campaign for more just trading relations between the North and the South. EFTA therefore supports the campaigns of various organisations against the planned EU directive on the substitution of cocoa butter in chocolate. In Austria, Switzerland, Belgium, the Netherlands, the UK and Germany people have signed petitions against this directive. The European Commission is having difficulty in finding a compromise. Some countries like the Netherlands and France are opposed to the 5% directive, so it is possible that the EU may leave the decision of whether or not to introduce the 5% directive to national parliaments. Another possibility is that a compromise between 0 and 5% will be proposed. In the interest of small cocoa farmers, EFTA is lobbying for the option of 0% at the European Parliament.

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