Analysis of cocoa and chocolate purchasing practices that could undermine living incomes for cocoa farmers

Case Study 6: The Living Income Differential for cocoa: futures markets and price setting in an unequal value chain

1. Unfavorable trading system for actors upstream the supply chain

To which extent does the trading system (including the stock market) lead to inequality by design?
Is there proof that companies (or other actors) use their influence to keep this “business as usual” trading system in place?
What are the barriers that upstream actors need to confront to challenge this system?

2. Which internal business practices of companies lead to a downward pressure of cocoa prices?

How important are bonusses for purchasing clerks who manage to “beat” the market?
What’s the importance of cocoa stock management and reporting on grinding ratios.
Is there an impact of the recipes that companies use for their recipes (raising or lowering cocoa content) on cocoa prices?
To which extent do companies change cocoa sourcing to different areas when prices are raising in one origin. How does this company policy in-fluence prices? To what extent has this happened in the context of the LID?
Are companies purposefully delaying their cocoa purchases in order to lower negotiation power of governments, cooperatives and farmers?
How can the identified unfair purchasing practices best be included in the revision of the Directive 2019/633 on Unfair Trading Practices? See also research question 6.

3. Who negotiates down the different (country) differentials?

How are the country differentials determined?
Do certain companies have excessive power on the height of the differentials?
How does the influence of different actors in the supply chain compare when it comes to the height of the differentials? What’s the role of traders, confectionery brands and supermarkets?

4. How is financialization and speculation on commodity markets un-dermining the bargaining power of actors upstream in the supply chain (governments and cooperatives)?

Are traders (or other actors) using their privileged position and access to information to lower prices on the commodity markets?
Do traders (or other actors) use this position to increase volatility and thereby eliminating financially weaker actors on the market and consolidating their own position?

5. How do different strategies and actions compare in terms of influence on prices?

Make a ranking of strategies and actions from “low influence on prices” to “high influence on prices”
Are there other strategies and/or actions companies are using to under-mine the negotiation power of upstream actors and lower cocoa prices?

6. To what extent are these strategies and actions in line with current and upcoming (inter)national legal frameworks (UTP, UNGP, Devoir de Vigilence, CSDD-Directive, etc…).

Are these frameworks adequate to prevent companies from harming the right to a living income through their purchasing practices?
How could these frameworks be amended so they protect the rights of farmers and workers better through human rights sensitive purchasing practices?
How could Multi-Stakeholder-Initiatives help regulate these actions that undermine sustainability in the sector?

The extreme dependency of countries like Côte d’Ivoire and Ghana on cocoa, both in terms of livelihoods of the population as government finances, combined with mostly absent supply management tools, puts these countries in a very weak position when negotiating cocoa prices.
Chocolate companies outsource the responsibility for (fair) prices paid to farmers to their suppliers. The latter work on much tighter margins and are not willing to take up that responsibility. The result is widespread poverty in the supply chain, with numerous social impacts (child labor, hunger, …) and environmental impacts (deforestation, monoculture).
Chocolate companies didn’t change their purchasing practices after their promise to “pay the Living Income Differential (LID)”, a pricing scheme installed by the Government of Ghana and Cote d’Ivoire in 2020 to ensure their cocoa farmers receive a higher income. This stimulated cocoa traders to negotiate down country differentials as a compensation for the LID. These country differentials turned negative, whereas they are meant to reflect the quality of the cocoa beans.
Cost of production, cost of living and human rights are irrelevant criteria in the current functioning of the cocoa market. One example of that was the inability of market participants to “hedge” the LID on the Intercontinental Exchange (ICE), which is the undisputed place where prices are defined.
The significant rise of country differentials before the introduction of the LID in October 2020 indicates that many companies decided to increase their cocoa stock significantly. The drop in demand for cocoa during the 2020-21 crop season – and the drop of country differentials – may have been an immediate effect of this corporate strategy, ultimately undermining the LID-initiative.
The experience with the LID confirms a larger pattern in which new voluntary premiums are often discounted from previously existing ones, thereby confirming the power imbalance and the price status-quo.
Futures markets allow for considerable price and supply risk reduction for participants of the market. However, the high entry barriers and at the cost of heightened volatility of the cocoa price, which is not in the interest of cocoa farmers nor consumers.

Voluntary multi-stakeholder initiatives
Sustainability certification schemes
Market-concentration in the cocoa supply chain
Government export bodies
Futures markets
mHREDD

Producer country’s export policy
Producer country’s social protection policies
EU deforestation policies
EU trade policy

The cocoa supply chain is characterized by extreme inequality in terms of power and risks between the producers (small scale farmers) and the co-coa/chocolate industry that buys and transforms this product.

The central concept of research will be the Anker & Anker methodology for calculating living income.

Desktop study and where possible stakeholder interviews to recon-struct theories of change (ToCs) implied in currently implemented business initiatives and programs aimed at raising farm gate prices as a strategy to allow farmers to reach a living income. Producing data on existing ToCs
articipatory qualitative research (including interviews, focus groups) with key stakeholders (farmers, farer cooperatives, local government, key chain actors) to investigate and validate different hypotheses/ToCs present in these approaches and map their ef-fects.
Data collection (through participatory surveys) to compile firsthand testimonies of farmers and families who have been involved in a scheme that raises farm gate prices as well as data on income

The study has lead to a better understanding, especially among civil society members of the way cocoa is traded: what’s the position of each actor in the supply chain? What’s the game theory that applies to each actor? How each actor could take responsibility to provide sustainable livelihoods for cocoa farmers?
The study also has contributed to ongoing conversations on good purchasing practices in the cocoa sector and a civil society call to action toward chocolate companies.
The study was launched right before the World Cocoa Conference in Brussels (April 2024), where paying a fair price was a central topic.