In the debate on strategies for improving the position of cocoa smallholders in West Africa, several studies focus on methods of poverty reduction by looking at various features, such as land tenancy, fair trade, living wages and market reforms. There is consensus that there is no ‘one size fits all’ solution, but reliance on partial approaches and limited use of systems transformation thinking means there is disagreement on the effective pathways to improve livelihoods.
A recent report by Yuca Waarts (Wageningen Economic Research) and Manuel Kiewisch (Mondeléz International) examines cocoa farmers’ incomes in Ghana and Cote d’Ivoire. It shows that neither yield increases nor better farm-gate prices offer sustainable alternatives for reaching a living income, and instead advocates for income diversification and engagement in off-farm employment.
On the other hand, Nico Roozen counters that we need to pay more attention to price rise opportunities which directly affect household income, compared to costly yield investments which can lead to negative price effects.[1] Therefore, major attention should be given to tighter market linkages and improving governance to enable cocoa farmers a decent living standard.
Both pieces highlight important challenges, but fail to define key mechanisms to modify and improve this situation, or to consider the behavioural drivers of cocoa households. There are three important issues that shape the likelihood of stakeholders adopting innovations and engaging in improved management around cocoa livelihoods that are generally overlooked:
- Investing in farms or in people: creating spillovers
Farmers’ motivation to introduce substantial changes in production systems relies on tangible benefits at the level of household consumption: improving (child) nutrition and increasing the amount of healthy labour days may be more relevant than a higher net farm income. Therefore, supporting smallholder development from the consumer side, using vouchers and cash transfers as incentives for farm investments is now widely advocated for.
When considering the cocoa farm as a unit of both production and consumption, key strategies towards improving livelihoods start with investing in the labour capacity of the household workforce, including education around farm innovation and potential off-farm income generation. The latter has potential to create important spillovers between different activities within the cocoa household, and diversification of household revenue sources reduces dependence on cocoa and improves farmer’s willingness and ability to invest in cocoa upgrading.
- Improving total factor productivity: focussing on leverage points
Smallholders’ income simultaneously depends on the returns to land, labour, and capital, expressed in the concept of ‘Total Factor Productivity’ (TFP). Farmers can best increase their welfare by creating additional value from those resources that are most scarce to them.
In the smallholder cocoa sector, both land and capital are limited, but (family) labour is especially scarce. Land cultivation is thus constrained by the labour demand and child labour is used for certain cocoa cultivation activities, demonstrating the insufficiencies of simply increasing resource availability. Instead, key leverage points at institutional and behavioural levels need to be identified to generate higher returns to production factors.
There is consensus that in the cocoa sector secure land rights are critical for enabling investments in better management of cocoa trees. Also, empowerment of women can improve balanced decision-making on household investment and resource allocation.
- Fair prices or fair chain?
Fair prices and premium payments are critical to supporting livelihoods of many cocoa farmers, and prices should increase when ‘real costs’ are considered, including social and environmental externalities. For Roozen, fair pricing is crucial, whereas Waarts & Kiewisch show that even large price changes cannot guarantee minimum living income. Both studies agree that a more comprehensive set of measures is required to support cocoa farmers.
Cocoa purchase costs only represent 3-5% of the price of a chocolate bar, meaning farmers receive a tiny share of the total value added in the cocoa chain. Other activities outside of the production country, like processing, transport and retail receive more than 80% of the market price, and local trade taxes take away part of the national value added. There is an urgent need to discuss opportunities for supporting a cocoa ‘fair chain’ based on better transparency and a substantial redistribution of revenues between supply chain parties. A tiny 1% reduction of the retail share could be translated into a 10% increase in farmer’s income.
Both articles focus on options for improving smallholder welfare through better resource use efficiency, without paying too much attention to the cost-effectiveness. Moreover, little research is undertaken to understand the behavioural incentives that enable cocoa farmers to take advantage of these opportunities which is key to engaging farmers in agricultural system transformation.
Both studies also outline a set of policy interventions for supporting a more inclusive and sustainable cocoa sector. Key strategies include: higher farm size, cost reduction, yield improvement (through sustainable intensification), higher price, crop diversification, better market linkages and good (pro-active) governance. Balancing the composition of these policies is important in reaching success; some measures may contradict each other, whereas other changes may lead to unexpected results.
The fundamental weakness in current literature is that usually much attention is given to socio-economic dimensions (farm size, prices, income) and technical innovations (better inputs, digitalization), thus trying to answer the question: what can be done to improve the cocoa sector? The more relevant question, however, should be how to change the dynamics of the cocoa sector?
Alongside promoting a compressive set of interventions to make the sector more inclusive and sustainable, we need to understand how these changes can improve stakeholder responsiveness and sector governance. Attention should therefore be given to innovations and incentives which promote self-enforcing mechanisms to redefine stakeholder relationships, which will only take place when underlying behavioural drivers are understood and addressed.
To support our future thinking on these strategic issues, we can derive from widely available experimental research the following interventions for improving cocoa governance:
- Land Rights: registered and transferable tenancies are important as a collateral for borrowing. Land acts as a productive resource and a means of insurance, however land rights registration is usually biased against women and inheritance rights are not always guaranteed.
- Risk: Risk factors drive market inefficiencies and uncertainties on future returns, causing major constraints to sustainable intensification. Diversification of activities (e.g. ‘putting their eggs in different baskets’) can help insure against risk, enabling access to different income streams and helping to manage seasonal variation, but may come at the expense of lower revenues due to the loss of specialization advantages.
- Women empowerment: Gender equity is important for balanced household decision making, especially around reproductive health, nutrition, housing, and schooling. Evidence shows that investments in building the capacity of women deliver high payoffs in productivity, sense of security, and physical integrity. Therefore, empowering women in decision-making can lead to increased livelihoods for cocoa households.
- Chain efficiency: linkages between farmers, traders and input providers are subject to large inefficiencies, partly due to limited competition. There is large mistrust between farmers and traders. Investments in mutual reputation, reliable and enforceable (longer-term) contracts, and trust are considered critical for improving the efficiency and traceability of transactions, thus enabling a shift in margins and redistribution of value-added shares in favour of upstream segments of the supply chain.
- Time horizon: farmers need a large time horizon to be able to engage in long-term in-depth investment decisions that deliver revenues after 4-5 years. Ownership rights, information on future prices, longer-term delivery contracts, and reliable weather information systems can all improve the time horizon.
- Farmer’s cooperation: individual cocoa smallholders are not able to negotiate with traders and input providers, so they need a collective organization that creates economies of scale and bargaining power. Farmer’s groups frequently fail if members are all alike (the so-called ‘coalition of the poor’) and need some degree involvement from midsize and larger farmers. In addition, more attention needs to be given to transparent internal mechanisms to ensure compliance and to avoid coercive, dominant systems.
- Public policy: public investments in physical and commercial infrastructure can guarantee farmer’s access to markets and information, thus helping to support more equitable exchange. Local communities must have significant control over decision-making before engaging in major investments. However, public fees for land, and ownership and export taxes can be a disincentive for further investments in cocoa upgrading. The current taxation regimes hinder functional upgrading and tend to discourage local processing, which are already strongly anti-poor. A key role for public policy is therefore related to the enforcement of better quality grading practices and the support of more transparent cocoa governance mechanisms.
Finally, two important issues still deserve attention. First, considerable variation amongst cocoa farmers in terms of farm size and specialization, and in terms of resource use intensity and yields, means cocoa policies and programs need to be differentiated to consider the demands and opportunities of different types of farmers. Second, the main constraints for improving income and welfare need to be identified in order to select appropriate policies. The relationship between these constraints is integral: making choices is an intrinsic part of policy making!
In summary: If structural transformation in the cocoa sector is pursued, priority attention should be given to the reform of governance mechanisms, institutional innovation, and reinforcement of ownership structures. This may pave the way to support behavioural responses by cocoa farmers. We need ‘clever incentives’ to enable smallholders to escape from poverty. Future discussions must be based on careful listening to what drives the decisions of cocoa stakeholders and thus may support more fundamental changes in their behaviour.
[1] The idea that higher farm-gate prices could lead to oversupply of cocoa is – at least – questionable. Cocoa is a perennial crop and its production area is only adjustable in the medium term. Moreover, stock management and future transactions play a key role in the process of price determination in the cocoa market.
