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
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
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
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
"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
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
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
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
"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
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.
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
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
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. +