Giulia Porrini
contact: giulia.porrini31@gmail.com
The number of transformations a cocoa bean undergoes before becoming chocolate gives us an idea of the amount of people involved in the cocoa value chain. With the concept of value chain, we refer to “the linked set of value creating activities all the way from basic raw material sources for component suppliers through the ultimate end-use product delivered into the final customers’ hands”[1]. Basically, we follow the raw material, the cocoa bean, from the plantation to the final product offered to the consumer, focusing on the actors who play a role within the series of transformation activities. Beyond acknowledging the long chain of people involved, it is very important to understand the kind of relationships and dynamics between them. The size, economic power, vulnerability connected to risks, integration into the market etc. are all factors that affect the strength of each actor and his sustainability.
We will analyse briefly the value chain segments, considering supply, processing activities, and distribution. We will focus on the demand, describing the new tendencies, and, finally, discuss the main cocoa international value chain characteristics.
Supply
The cocoa supply is concentrated in a very narrow geographic band near the equator, between 20ºN and 20ºS, due to climatic and rainfall requirements of the crop.
This band includes:
- West Africa, in particular Côte d’Ivoire, Ghana, Nigeria, Cameroon and Togo,
- parts of Central & South America, especially Brazil, Ecuador, Peru, Dominican Republic, Colombia, Mexico, Belize, Costa Rica and Panama and
- Southeast Asia, mainly Indonesia, Papua New Guinea and Malaysia.
Photo by Andrea Onelli
Native of the upper Amazon region of northwest South America, it spread in Central America and has been imported by colonialists in Africa and Asia during the 19th century in order to meet the growing demand. In particular, it seems that the first cacao plant growing in the African region was localized on the island of San Thomé in 1822, introduced by the Portuguese[2]. In the 1870s cocoa plants have been introduced also in the West African Gold Coast and Southeast Asia[3].
World cocoa production has risen erratically from almost 2.9 million tonnes in the 2000/2001 to almost 4.8 million tonnes in the 2018/2019[4], with an average annual growth rate of 3.2%, whose deviations are mainly due to the influence of climatic factors. According to the 2018 data, the 76% of the production is grown in Africa, 17% in Latin America, and the remaining 7% in Asia/Oceania[5].
The International Cocoa Organization (ICCO)[6] reports that Ivory Coast is the biggest producer: its production reached the 44% of the world production in 2018/19 and is steadily growing. Ghana and Indonesia have been slowly decreasing in the last decade representing, respectively, 18.7% and, 4.5%. Ivory Coast, Ghana and Indonesia are the three largest producing countries and, in aggregate, account for approximately 67.2% of the global production.
The following four largest producers are Ecuador (6.2%) which lately overcome Cameroon and Nigeria (5.1% and 5.2% respectively) and Brazil (4%), representing jointly the 20% of cocoa beans yield.
Cocoa is predominantly a smallholder crop, more than 90% of world cocoa production originates in fact from small, family-run farms, with approximately five to six million cocoa farmers worldwide. The typical farm are smallholdings of under 5 hectares, with the exception of Ecuador and Brazil, where the large-estate structure dominates. Yield per hectare varies not only by region, but also by country and by cocoa variety. There are two main categories of cocoa plantation: agroforestry and full sun system. The traditional system mainly used by smallholder farmers is the first one whereby forest is selectively thinned so that cocoa and other trees (e.g. fruit trees) can be planted beneath the remaining canopy[7]. This system has the potential of serving both economic and environmental ends, seen by many as the best method for preserving some of the intact biodiversity of the Atlantic Rainforest, especially in Latin America. The other system is the full sun plantation, an intensive monoculture mainly used in African big crops, where the original forest remains only in patchy fragments[8].
Most of the cocoa production is a bulk good (conventional cocoa beans) with enormous amounts of beans from different origins mixed together during the processing activities; on the other hand, there is the “Cacao fino de aroma”. The Fino de Aroma denomination is an ICCO classification which describes an exquisite aroma and flavour of the beans, which is generally recognized to derive from criollo and trinitarian varieties. The proportion of fine or flavour cocoa in the total world production of cocoa beans has always been relatively small and has being falling over the years. From between 40% and 50% at the beginning of the 20th century, with Ecuador and Trinidad & Tobago being the major producers, it currently represents just over 5% per annum, 76% of which is grown in Latin America.
Primary Processing
Besides the plantation managing and harvesting activities, farmers are in charge of the so-called primary processing: fermentation and drying process. These steps are very delicate and responsible for the development of those characteristics which determine the beans quality. Usually each farmer independently undertakes these processes and sell the beans once dried. However, there are more and more examples of farmers that, when logistic and social conditions allow it, organize themselves in groups. Joined in cooperatives and associations, farmers bring their yield in gathering centres near the plantations, where they are mixed together and processed in big batches. In this way they are able to put on the market bigger quantity of a uniform product, which is exactly what cocoa buyer needs. Sometimes chocolate producers in cocoa producer countries prefer to control the whole transformation process starting from the primary processing (given its paramount importance to obtain high quality chocolate). In this case, farmers are asked to sell beans still wet. Even though this seems an attractive selling opportunity, since it entails less work for the farmers, it is not the best option. Unprocessed beans’ price is obviously lower than dried beans one, which means a loss in profitability for the farmers. Anyway, this practise represents an exception. The big majority of farmers sell dried beans, either independently, or through a farmers’ organization. Directly, or through one or more traders, the cocoa beans end up in the hands of chocolate makers or grinders who are responsible for the secondary processing.
Secondary Processing
The secondary processing activities encompasses all the transformations between dried cocoa beans and cocoa derivates like cocoa liquor (or mass), cocoa butter, cocoa powder, and chocolate. Whereas the primary processing must take place in the producing countries, in the farm ground or nearby, the secondary processing has always been concentrated in other areas of the world, mainly for historical reasons.To explain this value chain’s characteristics, we need to go back to the 16th century, when Spanish colonists brought the exotic beans to Europe. While in their home countries, cocoa beans were consumed in a cold, spicy drink, the xocolatl, Europeans explored different ways to enjoy them. Consumed hot due to the cooler climate and with the addition of sugar and old-world spices to meet the local taste, cocoa spread fast in Europe. During the Industrial Revolution some important discoveries changed the course of cocoa consumption. First of all, the introduction of the steam engine made it possible to mechanize the cocoa bean grinding, progressively making the cocoa power affordable to the mass. In 1828 for the first time a hand-operated cocoa press filtered out the cocoa butter from the beans, allowing the extraction of the most expensive and precious cocoa component. Moreover, this discovery has been the foundation of the invention of chocolate as we know it. Adding a part of the so obtained cocoa butter to the cocoa mass (instead of using water, as every other chocolate maker did at the time), in 1847 in his laboratory in Bristol, Joseph Fry created the first chocolate bar. The new „eating chocolate“ has been incredibly successful, and in the early 20th century it outsold drinking chocolate. In 1875, in Switzerland another revolutionary change occurred when Daniel Peter produced the first milky chocolate by adding to the liquor an at-the-time new powdered milk developed by the chemist Henri Nestlé, an expert in milk products. Finally, in 1879, the texture and taste of chocolate has been further improved with the invention of the conching machine by Rodolphe Lindt. The fact that all these discoveries have taken place in Europe reflects the interest in this new product. “The industry is centred in Europe, that is where all the production technology comes from, where all the innovations regarding manufacturing take place”- writes J.G. Brenner in her book “Inside the secret worlds of Mars and Hershey”. It does not surprise that nowadays the majority of the world’s cocoa is imported, transformed, and consumed in Europe, followed by North America (United States and Canada). In 2011, the largest cocoa trade flow was between Africa, the world’s largest cocoa producing region, and the European Union, the world’s largest cocoa consuming region, representing 54% of the world total[9].
Over recent years, it is possible to see a tendency towards a more uniform global distribution of secondary processing activities, especially considering those developing countries where chocolate consumption is increasing. For example, countries like Indonesia and Brazil, two traditional exporter countries, are now net importers of beans from West Africa due to the rapidly growing domestic demand for chocolate. In the 14 years between 2000 and 2014, grinding activities have increased by 11.6% in Europe and by only 0.06% in America while those in Africa and Asia and Oceania have more than doubled[10].
Nevertheless, despite this trend towards redistribution, the major part of dried cocoa beans produced in the world remains destined for exportation (55%).
Within Europe, the major grinders are Germany and Netherlands where respectively 9,6%
and 12,7% of the total world cocoa beans are processed. In Africa, the major grinders are also the main producers: Côte d’Ivoire (12.3%), and Ghana (6.3%).
Regarding the Americas, United States grind almost 8.3% of total cocoa beans, followed by Brazil
which processes almost 5%. Lastly, within Asia and Oceania, Indonesia is the biggest cocoa processor, being responsible of the 10.4% of the global grinding activities, increasing by 3% in the last 4 years[11].
It is important to make some comments regarding the actors that get involved in the cocoa processing at this point of the chain. Below, we present different categories of actors whose similar roles can be mistaken.
- Cocoa grinders and processors are the companies that buy huge quantities of cocoa beans and produce semi-finished goods like cocoa nibs, cocoa liquor or mass, butter and powder. This category is dominated by big multinational companies like Barry Callebaut, Olam, Cargill, Ecom etc. Even though consumers are generally not familiar with these brands, their product is contained in the majority of the confectionery product available in the shops. Two processors, Barry Callebaut (which bought Singapore Ldt in 2012), and Cargill (after its merger with ADM in 2014, which has been acquired by Olam International in 2015), produce almost 80% of the world cocoa products.
- Chocolate producers or cocoa manufacturers are those who process the beans and make chocolate and chocolate confectionery for the mass market. This category is represented by very popular companies like Mondelēz International, Nestlé, Mars, Hershey etc. In 2012, only five companies (Mars, Molendéz International, Nestlé, Hershey’s and Ferrero) accounted for 88% of the confectioner’s market.
Despite their massive market share, these giants are not the only ones that transform cocoa in chocolate. There are still some little companies producing craft chocolate on a smaller scale, usually of a higher/premium quality, but at a disadvantage to the bulk, industrial market.
- By “chocolate makers” or “bean to bar producers” we refer to companies with a small processing capacity[12] that produce chocolate in small batches from fermented and dried specialty cocoa. Chocolate manufacturers and makers differ in terms of size and market: big companies aiming at the mass market on one side, and small companies producing high quality chocolate for a niche market of aware consumers on the other. Obviously, they use different equipment and techniques according to the beans’ characteristics, the products they aim to and the investment they can afford.
- Finally, chocolatiers or chocolate artisans usually buy couverture chocolate (chocolate with a specific percentage of added cocoa butter) directly from chocolate manufacturers/processors. It is used for the production of chocolate pralines, truffle, bars and other final products. They are specialized in the very last part of the cocoa transformation, creatively involved to create sophisticated treats they generally cannot afford to invest in the whole cocoa transformation process.
Demand
The traditional manufacturers and consumers of chocolate are Europe and United States, with a consumption of 1,812 and 775 million tonnes respectively in 2013[13]. The EU accounts for almost 50% of world consumption of cocoa beans, importing 1.2 billion Euros worth of confectionery goods and products and exporting products worth over 4.4 billion Euros[14]. On the other hand, the U.S. chocolate industry consumes USD 1.4 billion in cocoa and cocoa products. Even if Western Europe remains the largest chocolate market in the world, a slow growth suggests saturation.
Analysing recent decades, we can summarize the general chocolate market trends by analysing two main tendencies: on one side a new rising interest in chocolate and confectionery products in Asian and South American markets, on the other the growth of niche specialty and certified market in countries where the consumption of conventional cocoa products is not increasing anymore: EU and North America.
According to Mondelez, in 2014 the following eight are the markets where the market growth is strongest, driving 70% of the world’s confectionery growth: Brazil, China, Colombia, India, Russia, South Africa, Turkey, and Vietnam. Russia is the only emerging market to feature in the top 20 consuming nations with the highest chocolate consumption among the BRIC and MINT nations. Turkey and India have been pointed out as the main actors of the future chocolate market. In Asia, Japan is the largest consumer market for chocolate confectionery, producing more than 90% of chocolate (with a manufacturer’s value of USD 38 million) and importing the remaining part, to meet the domestic demand, from U.S., Australia, Belgium, China, South Korea, France, Italy, and Switzerland. The other two major emerging markets are China and India. Chocolate consumption in China has risen robustly in recent years: in 2010, the population of China consumed 40,000 tons of chocolate, while nowadays it has risen by 75% to 70,000 tons. The estimated Indian demand, instead, has reached 45,000 tons in 2013. In Latin America, the largest consumer is Brazil, where consumption has touched 198 million tonnes in 2013, turning Brazil, a traditionally exporting country, into an importing one.
With regards to traditional chocolate markets, like EU and North America, luxury chocolate market of artisan brands is expanding. Chocolate products are turning from a mass product into a niche high-quality good whose social and environmental impact is a key element in consumers’ choice. As well as other food product, in developed markets the products’ origin is an increasingly important driver in the consumer purchasing decisions. The traditional cocoa consuming countries of Western Europe (Belgium, France, Germany, Italy, Switzerland and the United Kingdom) as well as Japan are the main consumer markets for fine flavour cocoa, while the United States of America uses this type of cocoa on a smaller scale.
Photo by Giulia Porrini
Since the beginning of the new century the international interest for certified products such as cocoa has grown considerably. This tendency results from an increasing sensibility towards social and environmental product impact, critical elements in the moment of purchase. Both production and sales of Fairtrade cocoa have been growing at a relatively steady rate over the last years (from 11% to 50% per annum from 2008 to 2011) and volumes of Fairtrade certified sales are expected to continue their rapid growth pattern. Public commitments by multinational companies and nation legislation will likely lead to reductions in the gap between supply and demand in the coming decades. A positive trend is visible also in the demand for the other kinds of certified cocoa, particularly for what concerns Organic cocoa and fine aroma cocoa. This is the reason why all stakeholders within the cocoa value chain, from the largest manufacturing multinational companies to the smallholder farmers in developing countries, are involved in this new tendency.
Many major chocolate companies recently started using certified cocoa. There are various reasons for companies to move to certified supply chains: supply security, demand from consumers, improvement of brand reputation, credibility of claims, transparency of (a part of) the supply chain, cost reduction in sustainability processes, and efficiency. On the other hand, there is confusion regarding the amount of available certified cocoa in the market. Some companies claim that they cannot increase purchases of certified cocoa due to a lack of supply. Standards Bodies[15] and farmers, on the contrary, indicate that production of certified cocoa is far higher than demand. Although there are valid potential reasons for this overshoot, the current significant differences warrant further research on this gap in claimed supply and claimed demand (Cocoa Barometer[16] 2012).
In 2008, Cadbury (now acquired by Mondelez, formerly Kraft Foods) was the first major chocolate company to declare the use of certified cocoa. Concerning the major manufacturers, each of them follows different strategies in defining sustainability: some will use certification of the standard bodies, some are working through their own projects, and others are combining both approaches. In 2009, Mars was the first major global chocolate company to commit to use 100% certified cocoa for their entire range by 2020, followed by Ferrero, Nestlé and Hershey which made their commitment to be compliant to renowned standards with some spatial or temporal constraints. Moreover, even at a national level, some countries have started implementing regulation concerning the import of certified product: the Netherlands, the global leader in cocoa imports, have committed to use sustainable cocoa for all domestic cocoa and chocolate products by 2025.
From the production point of view, the past years have seen a significant rise in certified cocoa production. Considering Fairtrade, Rainforest Alliance, UTZ Certified production, the share of certified beans has risen from 3.4 to 33% of the world total production in between 2009 and 2013. As to what concern Organic cocoa production, sources are contradictory: an estimation presented by ICCO suggested 0.5%of the world production, while according to the International Institute of Sustainable Research (IISD) the percentage of organic cocoa in 2011 was equal to 2.5%, namely 104,000 metric tons. The bulk of Fairtrade production is concentrated in Côte d’Ivoire, Ghana, Dominican Republic, Ecuador and Peru; while Latin America[17] produces 70% of global organic cocoa beans. Dominican Republic is the largest supplier of organic cocoa worldwide with an annual volume of 5 000 tonnes[18].
Discussion and Conclusion
As you can notice from this brief overview there is a strong juxtaposition between the small family-run farms where cocoa is produced, and the few, large multinational companies in the North hemisphere where chocolate is manufactured and consumed. These two worlds appear to be divided, far apart in terms of localization and characteristics.
Only 8 traders and grinders control approximately three quarters of the worldwide cocoa trade. Five companies (Mars, Molendéz International, Nestlé, Hershey’s and Ferrero) accounted for 88% of the confectionary market in 2012. These impressive numbers show the asymmetry in terms of economic power between the actors involved in the chain and, at the same time, the concentration of the companies operating the downstream activities. Technically, we can speak about a bi-polar governance, where one pole, and the most powerful, is represented by the grinders, who are located in both producing and consuming countries, and the second pole by the large chocolate manufacturers. In this scenario, farmers are not actively involved at any point in the balance of power.
Another key point characterizing the cocoa value chain is the uneven value distribution.
Considering the chain as a whole, the economic value is not generated by the raw material: almost the totality of the final product value is added by the companies carrying out the downstream activities, normally operating in big consumer countries. Looking at the value distribution in the chain we can see that only 6% goes to the producers, whereas the other 94% is divided among the actors implementing the secondary processing and distribution.
The 3 mentioned value chain characteristics, namely (i) the strong fragmentation and disarticulation between upstream and downstream activities, so far apart and badly connected, (ii) the high concentration of multinationals in the downstream market and (iii) the uneven value distribution between actors, explain and weaken the farmers position. They appear excluded, passive participant of the chain, with low or insignificant bargaining power, little or no opportunity to improve their position by themselves.
Still, the producers are the ones that bear all the risks related to weather, diseases and the other environmental variables as well as the fluctuation of the international price. Moreover, it is important to notice that the actual beans quality is created by the farmers. The quality in fact does not depend only on the cocoa variety and the weather condition, the 70% of it depends on human action. The crop maintenance, the harvesting timing and technique, and precise first processing activities strongly determine the quality. If these delicate activities are not carried out in the best way, it will not be possible to enhance the quality of the final product during the following stages.
In spite of that, in a market where the 80% of world cocoa products are produced by only two multinational companies (Barry Callebaut and Cargill), it appears clear that quality is not the main goal. In a market characterized by such a production rush, the farmers position and the way they work do not make any difference. Quantity and consistency are the most valuable variables. The actual cocoa taste becomes secondary, it can be corrected and “standardized” afterwards, in the processing factories. Reacting to this pressure, producers ended up focusing on productivity, at the expense of quality. This contributes to the increase of agrochemical use, intensive plantation areas at the expense of the rainforests, highly- productive cocoa clones at the costs of plants biodiversity, or, more and more frequently, it determines the shift in labour force and land use out of cacao into more profitable products or the abandonment of the cocoa plantation.
However, despite these being the general tendencies characterizing the global cocoa value chain, increasingly numerous are the examples of farmers or group of farmers that are investing time and energy to improve their production. Willing to focus and learn about the environmental impact of production and the reasons behind the implementation of agroforestry system plantations, they are more and more aware of the importance of the “first processing” activities. The promotion of training projects with cocoa producers, with the opportunity to invest in transformation equipment and facilities open the way to the improvement of production quality. This is the first step to enter niche market, with a short value chain and fair recognition for all of the actors involved. At the same time, the acknowledgement of the weaknesses within to the cocoa value chain by the consumers is of paramount importance, and is able to shift the demand, through more aware everyday purchasing decisions.
Giulia Porrini
MBA development economics
Contact:
[1] Shank, J., & Govindarajan, V. (2004). Strategic cost management: The value chain perspective.
[2] FN Howes – African Affairs, 1946 – academic.oup.com
[3] A Booth – 2007 – Colonial legacies: Economic and social development in East and Southeast Asia
[4] Forecast by ICCO: file:///C:/Users/Giulia/Downloads/Production_QBCS%20XLV%20No.%201.pdf
[5] https://www.statista.com/statistics/235975/percentage-of-global-cocoa-production-by-world-region/
[6] ICCO is a forum established in 1973 by the UN, with governmental members from production and
consumption countries with the aim of administering the first International Cocoa Agreement. It is now the main world forum for the gathering and dissemination of information about cocoa, it promotes cocoa research
and studies of the economics of cocoa production, consumption and distribution and encourages development
projects concerning cocoa.
[7] May P., Vegro R., Menezes JA (1993). Coffee and cacao production and processing in Brazil.
Clay J (2004). World agriculture and the environment. Island Press, Washington
[8] This theme is further developed in the relative article “Cocoa production systems. Agroforestry system vs full sun plantation”
[9] The World Cocoa Economy: Past and Present, 26 July 2012. Published by ICCO – https://www.icco.org/about-us/international-cocoa-agreements/cat_view/30-related-documents/45-statistics-other-statistics.html
[10] Cocoa Market Situation_ICCO_2014
[11] worthy to notice that this big growth has being boosted by investments from by such firms as Cargill, Barry Callebaut and JB Cocoa.
[12] less than 200 metric tons of cacao per year
[13] ICCO 2013
[14] Economic Profile of the EU Chocolate Industry. World Cocoa Foundation, 2011
[15] There are 4 internationally accepted Standards Bodies: Fairtrade Labelling Organizations International, Rainforest Alliance, Organic, and UTZ Certified and they have the task of advising farmers on how to implement better farming practices, establishing protocols on dealing with environmental and social issues, implementing auditing and third party verification on these issues, and communication to consumers at the end of the trade chains, thereby creating a necessary level of assurance. Standards are defined after consultation and in close cooperation with various stakeholders in the cocoa supply chain, including farmers.
[16] Cocoa Barometer is a report evaluating cocoa sustainability efforts released by a consortium of European civil society organizations that includes Oxfam, Solidaridad and the VOICE Network. http://www.cocoabarometer.org/Home.html
[17] There are several explanations for the strong presence of Organic cocoa production in Latin America, including the traditional use of agroforestry production systems in the region, the production of cocoa for specialty markets and the existence of more direct supply chains in the region.
[18] FAO, 2009