2022 Living Income EN

Introduction

Living income is a human right, and as such deserves a centred position in any conversations around the changes needed in the cocoa sector. Though Living Income is a human right, the sustainability legislations that are being developed, such as the French Devoir de Vigilance and the EU Human Rights Due Diligence Guidance at best obliquely refer to living income. It must be unambiguously clear that living income is a key requirement for any multinational to comply to their obligations of Business and Human Rights. Recommendation: consuming governments should enshrine living income in legislation.” ][/sc] Living income is also the necessary precondition for all the other challenges in the cocoa sector to be properly addressed. When farmers must choose between feeding their family, and not cutting down old growth trees, it is not a choice. When they must choose between feeding their family or sending them to school, it is not a choice. Without a living income for cocoa farmers, cocoa will never be sustainable. However, most sustainability programmes – as well as proposed legislations - only aim to address living income in cocoa through either indirect approaches - often as a result of buying into the myths described below – or by skipping living income directly and trying to tackle issues such as child labour or deforestation without a holistic approach to solving the underlying poverty.

The past years have seen a series of major developments on the topic of Living income. The introduction of the Living Income Differential by Ghana and Côte d’Ivoire in 2019, the development of Living Income Reference Prices by amongst others Fairtrade and Tony’s Chocolonely, Living Income Benchmarks becoming available for the major cocoa producing countries by the Living Income Community of Practice, many different reports on the topic, and a whole range of programs developed by various companies aimed at increasing farmer incomes. The conversation has also moved from questions around the measurement of living income towards discussing strategies of closing the gap. And, increasingly, farm gate prices are becoming elevated as topic of debate.

In short, living income has become an accepted goal for the cocoa sector. Recommendation: All companies should develop time-bound living income action plans.

However, there is an overall lack of concrete commitments towards a living income, either by individual companies, by governments, or by sector-wide initiatives. Company purchasing practices have tried to circumvent or avoid higher prices such as the LID or Living Income Reference Prices. There has been very little conversation about the industry’s business model. There is an increasing focus on better-off farmers, ignoring the plight of the weakest farmers. And there are precious few farmer voices heard in this conversation, and gender equality is largely side-lined in this conversation.

It is therefore no surprise that farmers are still not earning a living income. In fact, they are very far from earning a living income. And many actors are largely pointing at what others need to change in their approach, rather than being willing to change themselves. In the words of a former senior cocoa executive, “it seems that these old-style sustainability interventions have been superb at guaranteeing future supplies for factories whilst keeping prices low. The unintended consequence has been the perpetuation of the main challenge that farmers face: poverty.”

Both industry and governments will need to significantly change their business as usual. Let us be very clear; not a single stakeholder group is currently doing what they should be doing to ensure farmers achieve a living income.

Resistance to the necessary change is real. A lot of this resistance has found its way into a wide range of assumptions, simplifications, and sometimes plain wrong ideas around why living income hasn’t been achieved yet.

The first part of this Living Income Compendium tries to answer these “myths” The use of the word ‘myth’ doesn’t mean that these arguments are always wrong, it simply means they are never completely right. The truth is generally a lot more complex than many of the simplifications and arguments brought forward. in a concise but clear manner, as a Frequently Asked Questions of sorts. The second part suggests a way forward, outlining actions for all actors involved, as well as providing a prioritisation of actions.

The Myths of Living Income

The use of the word ‘myth’ doesn’t mean that these arguments are always wrong, it simply means they are never completely right. And all of these ‘myths’ are regularly used in discussions in the cocoa sector to explain why most farmers are still desperately poor. However, there are many caveats to these arguments, and the truth is generally a lot more complex than many of the simplifications and arguments brought forward to defend the status quo.

Commodity farmers have to be poor

Living Income Community of Practice A living income Living Income is the net annual income required for a household in a particular place to afford a decent standard of living for all members of that household. Elements of a decent standard of living include food, water, housing, education, health care, transport, clothing, and other essential needs including provision for unexpected events (Living Income Community of Practice 2020). is the minimum level of decency for a household. As such, it should be abundantly clear that a living income is the starting point of a conversation on farmer livelihood, not a finish line.

However, most sustainability approaches see living income as an aspirational goal that will most likely not be achieved any time in the near future.

Such as the 2020 WUR/Mondelez paper No Silver Bullets. Many recent reports from the cocoa sectorshow that only the top performing cocoa farmers are able to earn a living income. These reports are incomplete, as there is a good chance that most of these farmers are actually making use of sharecroppers and tenants, and therefore there are households within this farm most definitely not earning a living income. There is an unspoken assumption that farmers of commodities, whether it be cocoa, soy, coffee, palm oil, or any other commodity, by default are expected to barely scrape by.

The stark contrast with employees further down the supply chain is striking. If you are a reasonable middle-manager of a chocolate company, you would expect to be able to earn a comfortable livelihood. CEOs and owners of chocolate companies can become the richest family in their country. But only the outlier cocoa farmers are expected to even reach the baseline of a living income.

Part of the reason why living income is considered merely aspirational is that companies only consider a very limited set of solutions (and predominantly at farm level). The cocoa/chocolate sector is highly profitable, these profits are just not shared equitably.

Most readers of this paper would not accept a status of living income for their own household. Why should it be acceptable for cocoa farmers? A mediocre cocoa farmer should be able to earn a living income, outliers should be able to become rich.

Higher yields lead to living income

The main approach of cocoa companies has been to try to increase farm productivity Common approaches to this are training in good agricultural practices, the distribution of cocoa and shade tree seedlings, and making available agrochemical inputs such as fertilisers and pesticides. . There are two main reasons why this is an insufficient approach.

Firstly, despite significant investments and countless efforts within sustainability programmes, Companies have had sky-high ambitions to see a tripling of yields, with some programmes claiming that 1,500 kg a hectare should be possible. average productivity seems to be going down, not up. One of the few exceptions to this is Tony’s Chocolonely. The hypothesis of the authors of this paper is that this is because of the changed incentive structure in this system; because of much better purchasing practices by Tony’s it is more remunerative for farmers to grow more cocoa.

IDH/Cargill/Barry Callebaut/ETG Secondly, recent reports Such as the recent IDH paper with Cargill, Callebaut and many other industry actors, as well as the 2018 Mars Farmer Income Lab report on what works to increase farmer income. show that productivity increase programmes do not have an inherent positive effect on net income Mars Income Lab paper of cocoa farming households. After two decades, these are devastating outcomes, considering this has been the key strategy of the cocoa industry to solve its biggest challenge.

There are several reasons why increased productivity in itself cannot be the key strategy to bridging the living income gap. It is important to state that though higher yields don’t always lead to higher incomes, they need to be part of the equation if farmers want to raise their incomes. Especially coupled with agroforestry, diversification, access to finance, input subsidies, etc.

Increasing productivity requires significant investments in resources, which are neither available nor affordable. Farmers would have to invest money and labour to obtain and apply these inputs. This requires access to affordable credit, which is not available to most farmers. In addition, credits are risky for farmers, as low harvests –- due to diseases, unfavourable weather conditions, a decrease of farm gate price, or a combination of these factors –- might leave the farmer with debts he cannot pay off. Even if they were available and affordable, these come with significant risks compared to the possible return on investment. Barry Callebaut recently stated that doubling productivity from current levels would require an increase of investment from $70 per hectare to $470 per hectare. This basically means an investment of $400 to achieve a net income increase of at most $200 per hectare, provided all other costs remain equal (something that is very unlikely).

Recommendation: Make available labour part of living income calculations.Furthermore, increasing productivity requires an increase in labour hours. Unfortunately, there are presently no publicly available reliable data on the relation between labour days and productivity per hectare. However, published and unpublished data of companies and research institutions available to the authors of this publication show that an increase to about 800 kilograms per hectare would require an increased amount of labour of at least 50%. Even with current production levels, many cocoa farmers in major producing countries find it difficult to find enough labour for their farms. This is, not coincidentally also one of the reasons why families revert to household members to help with the farming, which implies engaging children on their farms.

Recommendation: Ensure there is a business case for higher yields.Both of these challenges can be overcome, provided the return on investment will be high enough, and provided the risks are manageable. However, farm gate prices are too low and often uncertain. In Ghana and Cote d’Ivoire there are many reports of farmers receiving far less than the guaranteed farm gate price. The authors of this paper have regularly heard of farmers being compelled to sign documents stating they received higher farm gate prices than in reality. Furthermore both the risks of crop failure and of market collapse are fully borne by farmers.

Even if yield increases were to be achieved, a next problem would arise; a situation of oversupply, leading to lower prices. If only 10% of all farmers would double productivity and by this fulfil the requirements of many companies, prices would fall drastically, thereby undoing any potential improvement of net income.

Diversification leads to living income

Increasing income diversity by having multiple income sources is an important element of strengthening the resilience of farmer income. In the case of cocoa price collapses, crop diseases and adverse weather conditions, having alternative sources of income provide a stability that only growing cocoa could not offer. In fact, this strengthened resilience would provide cocoa farmers a stronger negotiating position in the market. Furthermore, diversification of production through diverse agroforestry can strengthen resilience by providing additional income and can lower input cost, increase access to food and fuel wood and provide significant environmental benefits. These include protection of biodiversity, reduction of reliance on agrochemicals through appropriate Integrated Pest Management, and stronger climate change adaption possibilities. An extensive discussion on the benefits, possibilities and limitation of agroforestry can be found in our 2020 Agroforestry Consultation Paper. 2020 Agroforesty Consultation Paper However, diversification won’t solve the problem of increasing the income of cocoa farmers. Closely linked to this is the myth that farmers can escape poverty by producing higher quality cocoa, for example for the fine flavour market. Though this might help a few individual farmers on a micro scale, there simply isn’t enough demand globally for fine/flavour chocolate. Most consumers just want low grade chocolate products with lots of sugar and milk in it.

Urging cocoa farmers to grow other crops to solve poverty is quite simply an outsourcing of responsibility. If cocoa farming itself is not remunerative, we need to fix the cocoa farming part. Additionally, cocoa producers in both Côte d’Ivoire and Ghana already have a strongly diversified income structure. The excellent KIT study Demystifying Cocoa provides a lot of insight into the current income status of cocoa farmer incomes. KIT Demystifying Cocoa

Diversified production requires a healthy market for diversified products. Ghana and Côte d’Ivoire are both net food importing countries, which is a strange fact considering their economies are largely agriculture focused. As such, there is a real argument to be made for agricultural and rural development policies that are much more aimed at strengthening local markets. However, farmers of possible diversification crops Such as coffee, banana, pineapple, rubber, or palm oil. generally are also poor. This signifies a feedback loop of poverty, with many different sectors not able to provide a living income, all looking to other crops to solve their problem. Closely linked to the argument on diversification is the argument that cocoa producing countries should focus more efforts on cocoa processing in country. Firstly, this ignores the fact that both Ghana and Côte d’Ivoire already process significant amounts of cocoa themselves. Secondly, increasing the share of processing does nothing to directly influence the economic situation of cocoa farmers themselves.

Diversification is an important element of good agricultural practices on any cocoa farm to strengthen resilience. It is not a solution to making cocoa more remunerative.

Bigger farms lead to living income

Some farms, the argument goes, are too small to be economically viable. However, this argument misses several important elements.

There is a limit to how big a farm can efficiently be managed by a single household. If the farm requires more labour than is available, this often leads to higher incidences of child labour.

We estimate the maximum viable farm size to be 3.6 hectares for Cote d’Ivoire and 4 hectares for Ghana. According to the 2016 KIT survey, average cocoa farming households have 3.29 adults in Ghana, and 3.65 in Côte d’Ivoire. If one were to calculate 6 labour days a week, and no holidays all year, that means there are 1,026 available labour days in Ghana and 1,138. A hectare requires about 285 labour days per year when applying Good Agricultural Practices. (Based on unpublished data provided by companies. We strongly urge the cocoa sector to make this kind of data more publicly available). Ghana = 1,138 labour days / 285 labour days per hectare. Cote d’Ivoire = 1,026 labour days / 285 ldph. At 800 kilo per hectare, this would mean that a high productivity farm could at best provide 2,880-3,200 kilo of cocoa beans. For achieving medium productivity, much less work is necessary, probably closer to 120 labour days per hectare, which would give a maximum viable size of 8.6-9.1 hectares. It would still bring in a lot more cocoa, probably between 4,500-5,000. At 800 kilo per hectare, this would mean that a high productivity farm could at best provide 2,880-3,200 kilo of cocoa beans. For achieving medium productivity, much less work is necessary, probably closer to 120 labour days per hectare, which would give a maximum viable size of 8.6-9.1 hectares. It would still bring in a lot more cocoa, probably between 4,500-5,000. It would also require a lot less investments, and therefore a lot less risk for the farmer.

On the other end of the spectrum, a farm that is too small to support an entire household will not require the full time of the household, and therefore will also not have to earn a full household living income. If a family spends 40% of their available time on the cocoa farm, it only needs to bring in 40% of a living income.

Furthermore, there is an inverse correlation between farm size and productivity per hectare; farmers grow more cocoa per hectare on a smaller farm than on a bigger one. This would suggest that small farms might actually be more viable than large farms. However, efficiencies of scale could benefit larger farms. More data is needed to provide a conclusive answer either way.

Additionally, in currently available datasets Such as the datasets by Tony's Chocolonely, the WUR/Mondelez study, Nestlés high performing farmers etc. it is highly likely that most farmers that seem to be earning a living income are helped by sharecroppers or tenants. However, their needs are not factored into the calculations.

Cocoa is a labour-intensive crop; the work has to be done one way or another. If it isn’t grown by smallholder farmers, it will have to be done by hired labourers, who will need to be receiving a living wage. Additionally, workers also need access to labour rights, including the right to freedom of association, which is often under pressure in cocoa growing countries.

We can’t help all cocoa farmers

Companies are increasingly segmenting farmers into various categories Identifying which households are currently better off than others, which have larger farms, identifying groups of farmers that can more easily reach a living income – or sometimes even already are doing so. Part of the argument to do so is that it is easier this way to design specific interventions, or even to learn from the more successful farmers. However, there are quite a few dangers to this approach. Farmers in the ‘higher’ segments are not one homogenous block, clustered in specific geographies. They are usually spread across all the other sourcing areas. Choosing these farmers to target is impractical at best, and probably impossible in most cases. Even if it were possible, companies that choose to focus their sustainability efforts on the better performing segments, create a selection bias in the reporting of how well programmes are working. The danger for greenwashing here is significant. , identifying both top-tier and bottom-tier farmers. The argument is often heard that there is no place in the supply chain for the weakest farmers. A ‘Just Transition’ would be needed, with fewer farmers left on bigger farms, all of them able to earn a living income.

Even if the cocoa sector would need to make a transition to less farmers And as we have argued earlier in this paper, that is a big if, because cocoa is a labour-intensive crop, and somebody will need to do the work. , cocoa and chocolate companies would have the responsibility – both on moral as well as on legal grounds – to ensure that these farmers can earn a decent livelihood elsewhere.

Morally speaking, the cocoa sector has made very good profits over the back of farmer poverty For decades, cocoa production has followed as well as driven poverty, which is argued in the 2020 Cocoa Barometer. This poverty has been a major driver for harms such as child labour and deforestation. Cocoa and chocolate companies are not innocent onlookers here but have been active agents in this process as well.  for the past decades. Now that companies are starting to be held accountable for this, they cannot simply walk away from the poorest farmers.

Moreover, under the concept of due diligence, companies have the responsibility to remedy the harm they have caused. This is clearly put forward in the UN Guiding Principles on Business and Human Rights. The third principle states that victims of violations must have access to remedy. It is not a remedy if poor and vulnerable farmers are abandoned by the companies that have purchased their cocoa for decades. We argue that this includes the harm of farmer poverty.

Vulnerable groups must be helped to reach a living income, not further marginalised, or pushed out of the cocoa value chain.

Gender and income

Recommendation: Design gender equality into living income approachesMany of the households that have been identified as ‘high risk’ are headed by females. The solution for these households is not to transition them out of cocoa, but to ensure that women have the same rights and opportunities as their male counterparts.

In Ghana and Côte d’Ivoire there are many factors that contribute to the fact that women and female-headed households earn significantly less than men and male-headed households.

Women have much higher rates of illiteracy and innumeracy, reducing their access to market. They do not have the same access to credit and inputs needed to professionalise. There is significant inequality in tree and land tenure between men and women, making it harder for women to be able to own land and/or to determine how the crops are grown. Women are also often not recipients of the trainings that their male counterparts receive.

Women do not automatically benefit from higher incomes. Every single programme and intervention must have a gender-specific approach, ensuring rewards are distributed equally, and risks are shared justly.

One key short-term challenge in that regard is to strengthen the position of women in male headed households.

Higher prices solve everything

An often-heard statement in conversations is that we shouldn’t only talk about price as the driver to living income. This, however, is largely a false statement, as so far there has only one been a single attempt to drive up farmer income by only looking at the price of cocoa.

The Ghanaian and Ivorian governments have attempted to address low farm gate prices by introducing the Living Income Differential, the LID. By imposing a levy of $400 per tonne on all cocoa sales from Côte d’Ivoire and Ghana, more money would be able to be passed on to cocoa farmers through a guaranteed minimum price. There are many signals that the guaranteed minimum price is often not paid at farm gate level in either country. For one season, the LID worked well, Not entirely coincidentally, it was during this season – the main crop of ’20–‘21 that presidential elections were held in both Ghana and Côte d’Ivoire. and though it is an important step in harnessing the power of the world’s largest cocoa producing nations The VOICE Network released a paper in support of the LID, when the mechanism was introduced. This paper also outlined a range of parallel policies that are necessary to ensure that it has a chance of success. Very few of these additional policies have been implemented so far. ,2019 VOICE Network LID paper the LID has had a limited impact. In addition to the LID, there are other differentials on the terminal markets, such as country and quality differentials. These other differentials have been negotiated downwards, to the level that any increase by the LID has been completely negated. Additionally, there are persisting rumours that companies try to circumvent the LID by a range of different tricks on the terminal markets. The most visible of these events was when the Ivorian and Ghanaian governments temporarily halted all of Hershey’s sustainability programmes when it was discovered they had made uncharacteristically large purchases outside of the LID. It is commonly understood in the sector that almost all companies have been involved in these kinds of practices in some way or another, though proof is largely absent. In Côte d’Ivoire, the higher prices only lasted for a season. Though Ghana is still keeping the price at the same level as when the LID was introduced, inflation and increased costs of living mean that in real terms this is a real decline in value.

Price interventions must be coupled with supply management These supply management strategies should be part of a broader government strategy for rural development and agricultural policies. if they are to have any success in the medium to long term. This is not only necessary to address the problem on of farmer of poverty, but without proper supply management strategies, this also can have potentially devastating consequences on the efforts to halt deforestation. Not only are supply management strategies currently absent, but many countries are also actively trying to promote an increase of national cocoa production. Most of these countries, such as Nigeria, Peru, and Ecuador, are not part of the LID system. However, Ghana persists in a desire to increase its their production by more than 50%.

There is a real need to raise farm gate prices, and there is a key role for producer governments to play here. However, without this being coupled with a wide range of other activities, higher prices alone will not solve the issues.

Higher prices solve nothing

Though it would be a mistake to only focus on price, very few company programmes include even a hint of higher farm gate prices. Fairtrade has developed a Living Income Reference Price, but this has found very little market uptake, and Tony’s Chocolonely has a significant pricing component in their Open Chain system, that has by now been taken up by several retailers, including Ahold and LIDL. This is a grave omission, especially considering price is the most direct way of supporting farmers. Any additional price increase translates into net income increase (unlike for the other income drivers). We note with concern that farm gate cocoa prices – and even living income in general – are also at present not included in any of the regulatory frameworks that are being developed in consuming countries.

As such, it is probably accurate to conclude that the chocolate industry is simply unwilling to pay higher farm gate prices as part of the solution.

For investments in good agricultural practices to be remunerative, farm gate prices need to be high and stable enough. During the price crash of 2016, some cocoa companies advised their farmers to no longer use fertilisers, as there was no return on investments. Data shows that when farmers are paid a higher price, productivity per hectare does indeed increase. Price, as cocoa farmers often say, is the best fertiliser. This data, sadly, has not been made public yet, so we cannot at present share the source.

2019 Cocoa Barometer paper on certification One modest way that higher payments to farmers has been attempted is through the premiumsassociated with certification systems Such as Rainforest Alliance and Fairtrade, who now both have fixed premiums of $70 and $240, respectively, per tonne. However, most of this amount must be seen as a compensation for the extra costs to comply to these standards. and with company sustainability programmes. Almost every chocolate and cocoa company has an in-house sustainability programme, some working together with the certification systems, others more independent. However, these premiums generally only provide marginally higher income for farmers and are insufficient to bridge the gap to a living income. On the other hand, certification premiums are an essential part of the income of cooperatives. As such, the financing provided through these systems are a key ingredient in helping farmers organise and provide the infrastructure needed for a lot of other necessary interventions. How premiums work differently for farmers than for cooperatives - as well as outlining other strengths and weaknesses of certification systems - can be found in our 2019 position paper on certification.

Some reports Such as the WUR/MDLZ paper and the Mars Income Lab (2015) paper. The authors note that reports downplaying the impact of higher farm gate prices are generally financed and/or commissioned by large chocolate companies. suggest that higher prices won’t help cocoa farmers significantly, and in fact might be detrimental to farmers in the long term. The argument being that higher prices will lead to more farmers wanting to grow cocoa, which could lead to both deforestation and oversupply. Interestingly enough, this is never brought up in the many efforts to increase yields at farm level. However, there are many caveats to this argument. All of these reports have looked at marginal prices increases that are well within the range of price swings within the current market. The world market price has been between $2,200 and $3,000 in the past few years. The farm gate price is a lot lower than even that. WUR/MDLZ has looked at the effects of a 17% price increase. The price that is necessary to achieve a living income is far above any of these calculations. For the 2020 Cocoa Barometer we have calculated that the farm gate price should be around $3,100 in both Ghana and Côte d’Ivoire. In the meantime, better availability of data indicated that farmers are smaller than expected, average yields have been declining, and costs of living and inflations have risen dramatically, indicating that this price could probably be erring on the low side. 2020 farm gate price calculation

It can’t only be about farm gate prices, but it must also be about farm gate prices. “Price is the engine of sustainability,” The words of a Ghanaian cocoa farmer in a consultation workshop hosted by the VOICE Network in February of 2022 but so far, the conversation about how to raise farm gate prices is not being had at all.

Higher prices only help better farmers

Another often heard argument against raising prices is that this primarily helps already successful farmers more than struggling farmers in less successful segment. Though this is true, it is hardly an argument not to increase farm gate prices. Unless one believes that successful cocoa farmers are not allowed to become rich, see also the first myth.  What it does do, is show that struggling farmers indeed need additional interventions besides higher farm gate prices.

Read more about Nestlé's Living Income Accelerator here. Many of these additional interventions are not necessarily based on the amount of cocoa that these struggling farmers can sell but are a lot more about the enabling environment. Gender equality, land and tree tenure security, as well as other household-based interventions need to be a part of this. A good example is Nestlé’s recently launched ‘Living Income Accelerator’ programme, that provides direct cash transfers to households separate of the amount of cocoa the household has sold. What makes this even stronger is the fact that half of the cash transfers are directly paid to the women in the household. What this accelerator still very much misses, however, is any attempt at fair pricing for the cocoa the farmer sells.

Supply and demand solve everything

Market Concentration and Price Formation in the Global Cocoa Value Chain, SEO, 2016 In response to the 2015 Cocoa Barometer, the Dutch government commissioned a studyon the role of market concentration and price formation in the global cocoa sector. One of the key outcomes of this report was that supply and demand don’t work for cocoa farmers. ”“The

Mansholt article. Already in 1991, a former president of the European Commission ”Sicco argued that in agriculture, “the price mechanism does not correspond very well to the ideal-typical neo-classical market concept.” This is even more the case for tree crops than in annual crops, as farmers are even more tied to their production.

Furthermore, whereas farmers do not have the option to momentarily switch their sources of production, many chocolate companies tend to substitute cocoa for cheaper ingredients when cocoa prices go up. The price of cocoa, it seems, isn’t very troubled by supply and demand. When there is oversupply, prices do go down. But when there is a shortage, prices don’t go up significantly for farmers. The price transmission is asymmetrical. I.e., farmers experience the dips but don’t benefit from the increases of market prices. As demonstrated by this recent analysis in a publication for investors.

Across the developed world, governments have chosen to decouple the remuneration of work from the system of supply and demand through the introduction of minimum wages. This kind of protection should also be put in place for agricultural workers In fact, ILO Convention 141 on Rural Workers’ Organizations states that smallholder farmers should have the same rights as agricultural workers. in commodities.

There is an increasing acceptance that the current system doesn’t work for farmers. At the same time, concrete proposals for how to reform the system remain scarce and companies continue to reap the benefits from this broken system. It can no longer be enough to hide behind the argument that “this is how the market works”.

Though markets can work well to set proper price levels when all actors have countervailing power, it does not work for cocoa farmers. One of the key determinants for a farmer’s income is therefore imposed on them. This asymmetrical power balance doesn’t just lead to low farm gate prices, it also leads to a very skewed distribution of value in the supply chain; farmers live in extreme poverty in a multi-billion-dollar industry.

There isn’t enough money

Another often heard argument is that companies must follow the world market price, is that the chocolate sector is a competitive one, and that companies cannot afford to unilaterally pay higher prices.

To provide context

  • In 2021, Olam’s profit after tax grew to record levels, by 179.4% According to their own annual report, their revenue rose by 31.2% thanks to “higher prices across most products and commodities, particularly grains, rice, cotton, cocoa and edible oils in 2021”. .
  • In 2021, Cargill reported the biggest profit in the 156-year history of the company.
  • Barry Callebaut’s latest annual earnings report was summarised as providing “strong volume, solid profitability and continued good cash generation.”
  • In spring of 2022, Mondelez’s CEO said their chocolate division “powers strong profitability“, which is “driven by higher pricing” With 'higher pricing' they mean charging more to customers, not paying more to farmers. .
  • Hershey announced better than expected earnings and revenues with confectionery sales higher than pre-pandemic levels.
  • In the decade between 2010 and 2020, Nestlé has given their stockholders around $46 billion USD in share buybacks This is in addition to the usual annual dividens a shareholder might expect to earn.
  • In early 2020, the Ferrero family – Italy’s richest family –  paid themselves an annual dividend of €642 million. That would be enough to give every single cocoa farming household they source from a living income. It would still leave around €192 million to be paid out to its owning family.
  • From 2014-2020 the Mars family wealth increased from $60 billion to almost $94 billion.

It is a choice where companies spend their money.

We can’t talk about price because of competition law

When all other arguments have run out, and when there is broad consensus that farm gate prices are an essential part of the solution, and that companies have a role to play, companies often shut down the conversation citing antitrust concerns.

However, farm gate prices are only a small part of the final sales price of chocolate, and as such higher prices at farm gate level do not directly have to lead to higher prices for consumers, which is what antitrust law is largely focused on. Furthermore, eradicating poverty should also be seen as being in the public’s interest, and as such could fall within a variety of anti-trust exemptions. Including, but not limited to, the Public Morals Exception Clauses in the WTO’s Global Agreement on Tariffs and Trades.

Competition law is rightly designed to protect consumers from price-fixing and other practices that can harm them. At the same time, competition law also limits the ability to tackle the issue of low farm gate prices. As such, some careful adaptation of antitrust legislation could be beneficial for the sustainability of cocoa and other commodities. An increasing number of voices are arguing that this doesn’t have to be the case, for a variety of reasons, although it would require further work to develop the concepts.A recent collection of excellent articles on competition law and sustainability has been released by Competition Policy International.

But even if joint action on low farm gate prices would not be permissible, there is no excuse for individual companies not to engage in strategies to raise the farm gate prices they are individually paying to farmers.

Antitrust law provides barriers to discussing higher farm gate prices, but ways should and probably can be found to ensure farmers receive a fair remuneration.

The Path to Living Income

In order for living income to become a reality for cocoa farmers, action is necessary on three separate dimensions at the same time: good agricultural practices, good governance policies, and good purchasing practices. Any corporate or government effort that does not move significantly on all three dimensions at the same time will not be an adequate response to the challenge.

Gender Equality

Without gender equality, living income will be very hard to achieve. Female farmers and female-headed households will not achieve a living income without the same rights and possibilities as their male counterparts. Furthermore, involving women ensures that solutions are much more effective. It is argued that for every extra dollar a woman earns, a male must typically earn two to three to achieve the same kind of positive household impact.

Gender equality is a broad societal challenge in virtually every country on earth. It is especially hard to reach in heavily paternalist societies. It would not be realistic to expect the cocoa sector to solve this. However, we do expect the cocoa sector to contribute toward gender equality.

Actions should include empowering women to be involved in taking household income decisions; ensuring payments are (at least partially) done to the women in cocoa farming households; providing equal access to GAP trainings, credit, and inputs; strengthening female literacy and numeracy; tenure security rights for women; etc

Good Agricultural Practices

Focussing on Good Agricultural Practices (GAP) has been the strategy that has seen by far the most attention over the past two decades, as argued in the previous part of this Living Income Compendium. For GAP to be part of a path to living income in cocoa, there are still key issues to be improved.

  • A shift from monoculture towards diversified production is necessary, particularly towards complex/diverse agroforestry There is a lot of confusion about what agroforestry is, with many different definitions currently being used. A suggested way forward on complex/diverse agroforestry systems can be found in the 2020 Agroforestry Consultation Paper systems.2020 Cocoa Barometer Consultation Paper on Agroforestry
  • GAP trainings – and input providers – should move away from the use of highly hazardous pesticides In the best of times, agrochemicals were not available and affordable to most farmers. With the current price increases in agricultural inputs due to the Covid pandemic and the Russian invasion of the Ukraine, this has only become worse.  towards more holistic Integrated Pest Management, where the use of HHPs are reduced to a minimum.
  • Each cocoa farmer should be coached to implement an individual farm development plan, that is based on local specifics such as soil types, elevation, local climate, and shade crops, rather than on generic approaches and generic inputs.
  • All farmers should have access to affordable credit and inputs, so that they can invest in and develop their farms. Financial inclusion mechanisms need to be developed specifically for smallholders, and for female headed households.

Good Governance Policies

Increasingly, the topic of good governance is being discussed within the cocoa sector. This dimension is all about the enabling environment within which a living income can be achieved. All the items in this category require government action of some sort. Many – if not most – also require corporate action. In fact, the UN Guiding Principles on Human Rights explicitly state that even if governments do not fulfil their duty to protect human rights this does not provide corporations an excuse to not fulfil their obligations to respect human rights.

  • It is a matter of high urgency that the cocoa producing countries start acknowledging that supply management solutions Supply-management instruments can range from the extremes of bufferstocks and national production quotas – such as implemented in the cocoa sector for much of the 1970s and 1980s – through to more subtle tools such as rural development policies or land reform. Even an announcement by the Ghanaian government that they will no longer pursue a production target of 1.5 million tons would be a step forward.  are part and parcel of any successful living income policy. As a global issue, governments should align on common strategies to ensure transparent policies that put farmers first.
  • These strategies should be firmly embedded in national rural and agricultural development strategies in cocoa producing countries Agricultural policies should have food sovereignty as their main focus. It is a strange situation that both Cote d’Ivoire and Ghana are agricultural powerhouses, but both are net food importers. A just transition towards food sovereign agriculture is necessary. Cash crops, such as cocoa can play a major role in enabling this transition. that focus on both food sovereignty as well as on rural infrastructure Including healthcare, sanitation, and educational facilities. .
  • Governments in producing and importing countries need significantly increased transparency and accountability of how public funds – including the LID – are collected and directed to support a transformation in the cocoa sector. Supply chain transparency is also an essential part of this. An extensive overview of the necessary changes in Transparency and Accountability can be found in a separate Cocoa Barometer Consultation Paper on this topic that is soon to be published.
  • Governments in consuming nations need to make living income a key part of any Human Rights and Environmental Due Diligence regulation, requiring time-bound action plans by corporations.
  • Governments in consuming countries, international organisations, and donors need to make available significant funds to tackle farmer poverty.
  • Speculation on the terminal markets should be regulated to limit speculation off the back of farmer poverty.
  • The capacity of farming communities should be supported and enabled to self-organise to have a bigger voice.

Good Purchasing Practices

The least developed of the three dimensions described here are Good Purchasing Practices. Although they also deal with the farm gate price paid to farmers, purchasing practices range much wider.

Many of the holistic interventions that this paper calls for are long-term processes that will lead to change over time. However, (extreme) poverty is a daily reality for the vast majority of cocoa farmers. They cannot afford to wait until long-term processes – such as diversified income, higher productivity, or a better rural infrastructure – have come to pass.

Most Good Purchasing Practices do not require collective action, nor do they require a long development process; they can be implemented on a relatively short term, by individual corporate actors.

There are two key objectives of Good Purchasing Practices. The first is to attempt to redress the unequal distribution of risks, where at present farmers bear virtually all the risks. The second is to redress the unequal distribution of rewards, of which at present farmers receive far too little.

  • Every company should develop a time-bound living income action plan that includes purchasing practices – explicitly addressing farm gate pricing. Every cocoa and chocolate company should set up a guaranteed living income minimum price.
  • Corporations should engage long-term contracts with their suppliers, defining specifically the long-term purchasing responsibilities of the company and selling rights of the farmer/cooperative, so that sellers are less at risk from one season to the next. This reform should ideally be directly coupled to KPIs of procurement teams in companies. Too often, sustainability and procurement are seen as two separate divisions of a company, leading to the dichotomy of farmers being engaged in poverty alleviation programmes, whilst the company procurement divisions are aggressively downwardly negotiating the price they are paying.
  • Systems should be developed that make it possible to distribute the income of producers over the year, thereby reducing the vulnerability in the lean months.
  • Methods need to be developed to ensure that extra price payments are redistributed throughout the community, so they can help the most vulnerable, such as women.
  • Beyond procurement practices, companies need to critically review business functions and resource streams such as shareholder pay-outs, stock buybacks, tax avoidance/evasion practices, and marketing expenditures. As long as a significant part of their first suppliers are living well below a living income, any such individual enrichment practices are entirely immoral.

Purchasing and Governance first

All three these dimensions – Good Agricultural Practices, Good Governance Policies, and Good Purchasing Practices – are needed to address the challenge of living income effectively.

However, not all three dimensions have an equal status. Good Agricultural Practices are only a worthwhile strategy if cocoa is sufficiently remunerative. As such, the first step that needs to be taken to tackle the challenge of living income is for corporations to start taking major steps forward on the Good Purchasing Practices. In a similar manner, we need governments (and corporations) making serious work on the Good Governance.

Only when both the responsibilities of corporations and governments are properly being met does it become fair to ask farmers to invest effort and money in improving their productivity. The burden to first move lies squarely with the companies and the governments in the cocoa sector. We cannot ask the poorest and most vulnerable link to take the biggest risks, with the least guarantee for reward. In that regard, the anti-poverty approaches in the cocoa sector have had exactly the wrong chronology for the past two decades. With an unsurprising, although unfortunate, outcome.

What is essential to stress here, is that living income will not be reached by project-based approaches. Achieving a living income will require a systemic approach, and system, change.

It is high time to tackle farmer poverty. And first to bat are the large corporations and the governments in producing and consuming countries.

Colophon

Text: Antonie C. Fountain
Citation: Fountain, Antonie C. (2022): 2022 Cocoa Barometer Living Income Compendium

Additional contribution by: Uwe Gneiting (Oxfam America), Isabelle Roger (Solidaridad), Bart van Besien (Oxfam Belgium), Maartje de Graaf (Tropenbos International), Monica Burns (Freedom United)

Published by the Cocoa Barometer Consortium.
Administered by the VOICE Network.

The Cocoa Barometer Consortium consists of ABVV/Horval, ACE Japan, Be Slavery Free, EcoCare, European Federation of Food, Agriculture and Tourism Trade Unions (EFFAT), Fair World Project, Fern, Freedom United, Global Labor Justice/International Labor Rights Forum, Green America, Inades Formation, INKOTA-netzwerk, Mighty Earth, Oxfam America, Oxfam Belgium, Oxfam Ghana, Public Eye, Rikolto, SEND West Africa, Solidaridad Europe, Solidaridad West Africa, SÜDWIND Institut, Tropenbos International, Tropenbos Ghana, WWF France

Contact
Requests for information can be addressed to:  antonie@voicenetwork.cc

The final responsibility for the content and the views expressed in this publication lies solely with the authors.

The Cocoa Living Income Compendium is based on publicly available data as well as the off-record information provided to the authors. The authors welcome any corrections to data provided and challenge all actors of the cocoa sector to be much more forthcoming with public data on the core challenges the sector faces.

This paper is a Consultation Paper for the 2022 Cocoa Barometer, which is to be released in December 2022. The authors welcome any input, corrections and/or feedback on the content of this paper.

We encourage the use of (parts of) the Living Income Compendium in other publications, provided proper references are given.

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