United Nations: Diminishing power of small-scale farmers in cocoa GVCs
Published in SUNS #8372 dated 8 December 2016

Geneva, 7 Dec (Kanaga Raja) -- The situation of small-holding farmers - the backbone of world cocoa production - is of particular concern, as their already weak position in global value chains (GVCs) continues to be undermined by other well-integrated stakeholders, including traders, processors and manufacturers of cocoa and chocolate products.

This is one of the main conclusions highlighted by the UN Conference on Trade and Development (UNCTAD) in a Secretariat Note prepared for the sixty-third session of its Trade and Development Board (TDB) currently taking place here from 5-9 December.

"As a result, farmers have very limited room to negotiate appropriate prices for their output to cover production costs and leave them a margin for a decent livelihood," it said.

Estimates suggest that farmers only receive about 7 per cent of the total value added to 1 ton of cocoa beans sold. The majority of added value accrues to other stakeholders, including manufacturers and retailers, UNCTAD has pointed out.

To improve the situation of small-holding farmers, the Secretariat Note has recommended enacting or reinforcing competition law in agricultural commodity-producing countries, governmental actions for a supportive environment for local small players such as small-scale traders and agrifood processors, to remain in business, and the promotion of farmer-based organizations.

According to the Secretariat Note, concentration at all stages along agricultural commodity value chains - including horizontal concentration and vertical integration - has become a topical issue in recent years.

A limited number of large companies control a large part of the market, from trading to the processing and retailing of agricultural products.

For example, in 2002, two companies controlled nearly 50 per cent of the global banana trade and two others handled three quarters of the global grain trade.

In 2008, it was estimated that, globally, 45 per cent of coffee processing was carried out by the four largest companies in the industry and 80 per cent of tea markets were controlled by only three companies.

In 2012, it was estimated that four transnational corporations controlled 90 per cent of the global grain trade. In the same period, the leading four players in cocoa markets in Cote d'Ivoire, Ghana and Nigeria bought more than half of the cocoa beans produced in these countries.

The rationale behind concentration patterns in agricultural commodity value chains is the corporate objective of attaining economies of scale, amid increasing globalization of food chains, said UNCTAD.

The resulting market structure could effectively contribute to achieving a better allocation of resources while improving efficiency in global value chains of agricultural products, with the ensuing benefits passed onto all stakeholders along the value chains.

"Concentration patterns may also be explained, in part, by the fact that concentration at one stage of a value chain (for example, processing) may have the same effect at other stages (for example, manufacturing or trading). This permits the balancing of bargaining power along value chains."

However, said the UNCTAD document, while global value chains of agricultural products are increasingly being concentrated, farmers - the mainstay of agrifood production worldwide, who operate at small-scale levels - remain dispersed and thus unable to wield countervailing power against well-consolidated buyers and processors.

"This situation raises concerns about the state of integration of such farmers into value chains at a time when trade liberalizing reforms have increased their exposure to markets. Market concentration may become problematic, especially if it fosters monopolistic trends along value chains."

Such behaviour increases the bargaining power of large players to the detriment of small players, including small-holding farmers and small firms.

Such a market structure tends to reduce the profits of the latter, as well as the share of value added captured in producing countries.

Concentration in wheat, rice and sugar value chains, for instance, has led to the market power of international trading companies that, in turn, has contributed to widening the spread between global and domestic prices for these products.

HORIZONTAL CONCENTRATION IN COCOA SECTOR

According to UNCTAD, the cocoa global value chain (also referred to as the cocoa-chocolate global value chain) has five major segments: production; sourcing and marketing; processing; manufacturing and distribution; and retailing to final consumers.

The first segment of the cocoa value chain, production, is handled by a few producing countries.

At the global level, Africa remains the largest cocoa-producing region. It is estimated that in the 2013-2014 crop year, the continent produced roughly 3.2 million tons of cocoa beans, representing 73 per cent of global production.

In the same period, about 60 per cent of global production was handled by the two leading producing countries, Cote d'Ivoire and Ghana.

Cocoa supply may thus be considered highly concentrated in a limited number of countries. However, cocoa is typically produced by a number of dispersed small-scale growers: an estimated 5 million to 6 million farmers globally.

In Cote d'Ivoire, for example, 80-85 per cent of cocoa is produced by individual farmers who are not members of any cooperative or organization.

Cocoa trading is also characterized by market concentration, although this is not necessarily a new development.

From 1980 to the early 2000s, for example, the number of cocoa trading houses in London decreased threefold, from 30 to less than 10 players.

According to UNCTAD, the concentration pattern has accelerated in recent years due to several mergers and acquisitions. As a result, it is estimated that in 2013, the three largest cocoa trading and processing companies - Barry Callebaut, Cargill and Archer Daniels Midland - traded 50-60 per cent of the world's cocoa production.

At the national level, marketing channels for cocoa beans are also controlled by a limited number of players. For example, in Cote d'Ivoire, three international companies, through local agencies, bought about 50 per cent of the cocoa produced in the country in the 2011-2012 crop year.

"A major cause of the consolidation pattern in the trading segment of the cocoa value chain is trade liberalizing reforms. Liberalization in producing countries was expected, among other objectives, to increase competition in domestic intermediation and in the export of cocoa beans by increasing the number of players."

However, said UNCTAD, high operating costs, including transport costs, have contributed to strengthening the position of transnational corporations, which have better access than small-scale traders and buyers to resources (finance and technology).

As a result, most small players have been squeezed out of cocoa marketing channels or have merged with transnational corporations that took control of their activities.

"This has resulted in the dominant position of a limited number of companies with larger market shares in cocoa- producing countries."

With regard to processing, origin grindings (grinding operations taking place in cocoa-producing countries) have improved in recent years.

A limited number of transnational corporations dominate the markets. In 2006, four large companies, namely Barry Callebaut, Cargill, Archer Daniels Midland and Blommer Chocolate Company, controlled about 50 per cent of the global cocoa grindings capacity, and this share increased to 61 per cent in 2015.

Concentration in cocoa processing has been driven in recent years primarily by the recent boom in commodity prices. High prices of inputs, including cocoa beans and energy, have increased production costs for processing companies, resulting in narrower margins for most.

"Merger and acquisition strategies in the segment have therefore been used by existing players as a means of increasing cost efficiency and attaining greater economies of scale."

In the chocolate retailing segment of the cocoa value chain, a limited number of confectionery and branded companies lead the markets.

In 2013, for example, the total sales of chocolate bars and other candies by the leading 10 companies amounted to 42 per cent of global confectionary sales, estimated at $196.6 billion.

Chocolate products sold through modern grocery retail channels, including hypermarkets and supermarkets, accounted for 56 per cent of total global sales.

At the national level, retail markets are also dominated by a few companies. For example, in France, the main chocolate confectionery companies in 2014 were Ferrero (19 per cent of the market), Lindt and Sprungli (13 per cent) and Nestle and Mondelez (11 per cent each).

In the United States, the chocolate confectionary market is highly diversified in terms of suppliers, including transnational corporations and national, regional and local companies.

In contrast, the leading two chocolate manufacturers, namely the Hershey Company and Mars, accounted for 65 per cent of the sector's sales in 2014. None of their competitors individually exceeded a 5 per cent share.

VERTICAL INTEGRATION

The cocoa value chain has also experienced significant vertical integration, with companies expanding their activities, from sourcing beans to producing chocolate products.

UNCTAD noted that in the past, a number of large chocolate producers managed much of the value chain themselves, from buying beans to processing cocoa butter and powder to making chocolate.

Later, many cocoa and chocolate business entities (re)positioned themselves in specific segments of the value chain, with many of them exiting, for example, the less profitable grindings segment.

However, an increasing number of mergers and acquisitions in recent years has resulted in a high degree of vertical integration in the industry.

This pattern stems partly from the motivation of large companies to gain greater control of cocoa and chocolate products, to satisfy demand in terms of quantity, quality and traceability.

"The operations of some trading or processing companies have extended down to the farm level (directly via cocoa-buying stations or indirectly through agency relationships). This has created a blurred boundary between trading and processing companies, as major trading transnational corporations are now also engaged in cocoa processing and vice versa."

Other companies historically involved in midstream activities along the cocoa value chain have expanded their businesses to the upstream and downstream segments of the chain, that is, from the production of semi-finished cocoa products to, at one end, the sourcing of cocoa beans and, at the other end, the production of consumer chocolate.

Large chocolate manufacturers and brand owners, including Mars and Nestle, are now sourcing cocoa beans from farmers. As a result of these developments, only a few companies remain with operations in only one specific segment of the value chain.

In cocoa bean trading, for example, these include, at the international level, Continaf, Novel Commodities and Touton Group and, at the national level, Saf Cacao (Cote d'Ivoire), Roig Agro-Cacao (Dominican Republic) and Akuafo Adamfo (Ghana).

Concentration in agro-industry contributes to a better allocation of resources and economies of scale along value chains. This ultimately increases cost efficiency along a chain, with benefits passed onto various stakeholders.

"A fair distribution of benefits, which may not have the same meaning between stakeholders, is therefore a key determinant of the success of concentration patterns."

UNCTAD said with regard to cocoa, increased consolidation may have permitted the attainment of economies of scale and, as such, contributed to improving efficiency in the industry. Moreover, vertical integration in the cocoa industry has helped transnational corporations ensure the traceability and quality required by customers.

"However, concentration may become problematic, especially if it fosters monopolistic behaviour in an industry. Such behaviour increases the bargaining power of large and integrated players to the detriment of small players, including small-scale producers (that is, farmers) and traders as well as purely chocolate manufacturers."

It is common for concentration in a segment of an agro-industry value chain to lead to similar changes in other segments; this permits the balancing of bargaining power along value chains.

In the cocoa industry, while there is considerable concentration in the processing and distribution segments of the cocoa value chain, the supply segment (that is, the production of cocoa beans) typically remains fragmented among scattered smallholders.

"This situation creates an oligopsonistic structure in the cocoa market, that is, a large number of sellers and a limited number of buyers."

As a result, farmers are entrenched in a weak bargaining position, which reduces them to price takers, at a time when they also have limited access to finance, market information and agricultural inputs such as improved seeds and fertilizers.

In chocolate-producing countries, high integration - vertically along the value chain or horizontally in the cocoa processing and chocolate manufacturing segments - is likely to shrink input supply possibilities for purely chocolate manufacturing enterprises.

UNCTAD said that a long-term impact of this may be the closure of enterprises or their acquisition by major consolidated companies.

For example, the European Commission stated that the proposed merger of Archer Daniels Midland and Cargill, by eliminating an important competitor, could reduce the choice of suitable suppliers in already concentrated markets, which could lead to price increases, with a negative impact on consumers.

In July 2015, it approved the merger on the condition that Cargill divest Archer Daniels Midland's largest chocolate plant in Europe to a competitor to allow cocoa product markets to remain competitive.

UNCTAD cautioned that increasing consolidation along the cocoa value chain also increases the risks of anti- competitive practices and tacit or formal collusive behaviour among large players.

It noted that in absolute terms, cocoa farmer revenues are very low. The International Labour Rights Forum estimates that the net earnings of a typical cocoa farmer with 2 hectares of land in the leading two cocoa- producing countries, Cote d'Ivoire and Ghana, are about $2.07 and $2.69 per day, respectively.

These amounts are just above the global poverty line of $1.90 per person per day and do not permit farmers and their families to enjoy a decent livelihood.

"As the average size of a rural household in these countries may exceed five people, it seems evident that daily net income per person in the cocoa-producing communities may be much lower than the global poverty line."

As seen in the cocoa sector, concentration prevails in agricultural commodity value chains, along with the scattered nature of small-holding farmers, who are the mainstays of most value chains.

"This results in power imbalances along value chains and creates a favourable environment for the abuse of market power by large players. If such a market structure prevails unchecked, it effectively undermines competition in agrifood value chains, adding further downward pressure to prices paid to farmers," UNCTAD underlined.

POLICY RECOMMENDATIONS

To promote sustainable agricultural commodity value chains, UNCTAD said it is critical to empower farmers, in the face of increasing concentration along value chains. In this regard, policies aimed at keeping value chains competitive and promoting strong farmer-based organizations are crucial.

One of the policy recommendations made by UNCTAD is promoting competitive agricultural commodity value chains.

It said the current structure of agricultural commodity value chains results in power imbalances between highly integrated large players and smallholders, especially small-scale farmers.

Therefore, creating a level playing field for all stakeholders in value chains, by ensuring competitive markets at national and international levels, is critical to empowering dispersed small-holders, it added, highlighting two measures in this regard.

First, it is imperative to enact, or reinforce, competition law in agricultural commodity-producing countries in order to prevent anti-competitive practices and limit the market power of trading or processing companies that source their inputs from farmers.

Challenges in such countries with respect to competition law are often related to two issues, namely, how to enact and enforce such law and how to address the difficulties faced by legislators due to the extraterritorial characteristics of national markets, stemming from the fact that major transnational corporations active in trading or processing agrifood do not fall under the jurisdiction of producing countries.

The former challenge may be addressed by improving institutional capacities at the national level, with strong competition agencies. Addressing the latter challenge almost certainly requires harmonization of the rules dealing with anti-competitive practices, as well as cooperation between competition agencies at the international level, with effective oversight by an international body.

Second, competitive domestic cocoa markets require a supportive environment for local small players, such as small-scale traders and agrifood processors, to remain in business.

A key driver of the high concentration of buyers in the domestic agricultural markets of producing countries is the difficulties faced by local small players in competing on a level playing field with multinational corporations, as the latter have better access to resources such as finance.

Keeping local stakeholders, including local small and medium-sized enterprises, involved in national value chains requires addressing the high costs of finance.

UNCTAD also recommended the promotion of farmer-based organizations. "Organizing farmers into well- functioning farmer-based organizations may help address the problem of dispersion and counteract buyer power and, in turn, enable farmers to negotiate higher prices."

Moreover, farmer-based organizations facilitate member access to output markets and assist farmers to procure inputs such as seeds and fertilizers in bulk.

They also provide farmers with better access to finance and extension services, which in turn reduces their production costs while increasing their productivity, thereby increasing their profit margins and incomes.

"Such policies should effectively be complemented by pro-farmer trade and agricultural development policies and other actions that contribute to improving the efficiency of agrifood value chains for all stakeholders," said UNCTAD.

The role of Governments in shaping adequate policies and building strong institutional frameworks is important, it added. +